The Smidlap Motley Fool Stock Advisor Review
It really did turn out better than I had hoped
As you know I consider the Motley Fool my main mentors in figuring our my own personal finances and becoming a better investor. I was curious about how they generated such fantastic market beating returns so I analyzed every recommendation dating back to the launch in 2002. This is my Motley Fool Stock Advisor review.
Why review a service I have been using successfully for years?
I recently made a comment on a popular retirement blog that rhymes with Burly Retirement Now. My comment centered around how I have been picking individual stocks with the help of Stock Advisor and handily beating the market. I followed with some fool statistics about how they have been trouncing the market by almost 5x the S+P 500 returns since 2002. I should know better than to comment on anything that does not fit the narrative on anyone else's popular site!
Well, I haven't learned that lesson and I got back a response sounding like somewhere between "the scoring is all wrong and the SP500 probably did better" and "is that really stock picking or sector picking? you could have done just as well with a tech ETF." I'll illustrate with a few quotes from the resident academic guru who has many toadies and sycophants at his feet in the peanut gallery.
"Also, since 12/312002 the S&P 500 returned 500%. Probably more than the Motley portfolio after-tax. "
Uh, Nope! Here are the basics of how the Fools keep score. The founding brothers David and Tom Gardner each make one stock recommendation every month and track that stock return against the S+P 500 price on the day of the pick. That part would be very straightforward if they never closed a position.
They really are buy and hold investors just like the principles of The Smidlap Portfolio. Here's the straightforward exmaple:
They bought stock XYZ in April 2003. From that date until today the stock returned 839% while the S+P returned 536%. That's pretty simple, right?
How did that 500% SP500 gain since 2003 turn into just over 100% in 2020? I plainly said in my misguided blog commentary that the calculation is a time weighted average of returns. If the Fools had never closed any positions the curve of SP500 returns would look something like this:
Because there is a new return rate twice a month for 225 months there is no way an average return could be 500% as our guru claimed. What would you have me do with the returns from '19 and '20 which average around 22%? Just go ahead and turn those into 500%?! Just because it didn't fit the narrative well doesn't mean we miscalculated.
If we compared only to open Fool Stock Advisor positions the average SP500 returns from 2002 to 2020 would be 225%. So how did the Fools calculate the S+P gain to an average of 137% over that time? They chose to average the index gains against those of closed MF positions. Here is another example: Stock Advisor recommended shares of ABC in April, 2003. In May of 2005 they closed the ABC position because the company went private and is no longer publicly traded. The gain for the SP500 in those 2 years was 42% compared to 38% for ABC. There are a bunch of those kinds of transactions in the mid-2000's where the SP500 average was well under 100% and some even in the 20's and 30's versus the closed MF positions.
So even though the average SP500 return for 2003 was around 490% all those SP500 gains against closed positions drag down the average from 225% to 113%. Make sense to you? So the overall comparison (this is calculated through mid-December, 2020) of 547% for Motley Fool picks versus 137% for the index is calculated having to account for closed positions. Here are the returns per year for every position.
See those gigantic gains in blue on the left? That's how you outperform over a long period.
You can't just choose to ignore the closed positions like they never happened. Some were underperformers and some merged and a few others went private. Here are the data from each year and we'll review some more of the dominant performance for long periods and shorter ones too.
Enough percentage talk, what about dollar amounts for the Stock Advisor Review
The Gardner brothers have made a total of 451 recommendations since the Stock Advisor service launched in 2002.
I assigned a random $1000 equal investment amount for ease of calculations.
Of those 451 recommendations 208 are now closed and a bunch of companies have been recommended multiple times with great success.
I calculated the gains/losses for closed positions based on the original $1000 investment for the SP500 and the MF stock. I added up the amounts of those closed positions so we could calculate how much less than $451,000 we would have invested in "new money." After all, regular stock investors don't normally sell a stock and go and spend the money. They redeploy that capital into a (hopefully) more promising investment.
So, if you account for closed positions and their collective gains/losses, you got back $347k from the SP500 and $263k from the MF selections.
By my calculations if you bought all 451 Fool Stock Advisor recommendations you would have $5,200,000 as of December of 2020. If you bought the SP500 index on those same dates you would have $1,900,000. I probably could have accounted for when any positions were closed and redeployed that money but that would be too complicated. Hey, I'm not getting paid for this stuff!
If you only have been around 10 years and buying MF Stock Advisor picks your returns would have beaten the SP500 by almost $500k between 2011 and 2020 and over the past 5 years you would have won by $240,000 from 2016 to 2020. I'm willing to bet those differences grown as the more recent winners continue to outpace the market for years to come.
MF lost to the SP500 for all recommendations in only 2 years, 2014 and 2015. One of those was a lag of 10% and the other around 15%. Would you take that when your past 5 years looked like this?
If we only looked at the open recommendations the average percentage gains for MF was over 2000% while I mentioned the average SP500 gains was around 225%. So any guru academics who think the SP500 won can #SuckleMe.
There were plenty of losers in there
Not every selection has been a winner. I won't tell you exactly what companies are in those 451 picks as it is a paid subscription service. I don't think the Fools would mind if I told you much of those huge gains were due to buying Netflix in 2004 and Amazon in 2002. Want to know the secret of those gains? They didn't sell them when they doubled or tripled! Those huge winners more than made up for the losers. That's how it works.
What do you think was driving your index gains all these years?
If you have been an index investor all those years or even part of those years a big chunk of those gains are probably from about a dozen stocks and not the thousands of crappy ones in the index. I'll bet AMZN and NFLX account for a big healthy chunk of index gains in that time.
Motley Fool Does not close positions or "trade" very often
I've heard arguments and commentary about trading fees and tax inefficiency due to lots of trading. First, an individual buy and hold investor is not the same as a day trader or an actively managed fund! Even before zero commission trades became commonplace a couple of years ago closing 208 positions in 18 years is not bad. Even if you estimated $15/trade to close those positions 3 grand doesn't seem to bad compared to the $5 million you would be sitting on.
As far as taxes many of the closed positions were sold at a loss after holding a few years so you could have harvested those tax losses to offset any that have gained. The individual investor has the advantage of deciding when to sell and how much to sell to optimize taxes.
The recommendations have not all been in tech
There were plenty of selections that were not in tech, as if you could just achieve those kinds of returns with a technology ETF. Hell, man, Netflix isn't even a tech stock but in Communication Services! I'm really OK with a person misunderstanding the methodology but to blatantly deny the transparent performance baffles me a a little. Maybe Fool Stock Advisor faked all this along with the fake moon landing!
They are about as transparent as it gets
That's why I felt a need to put out Fool Stock Advisor Review. Every single selection is available and the rationale behind it. It is all extremely transparent. I say all this because this is the strategy we're trying (and so far succeeding) to duplicate in the Smidlap Portfolio along with the Malevolent Missy Stock Series for beginning investors.
Oh, I have mentioned many times in the past that I am not here to sell you anything but the Motley Fool probably should hire me to promote them. I am not affiliated in any way except as a satisfied paying subscriber. I am also not necessarily advocating this investing style for everyone. For most an index fund will serve you well but if you wanted to dip into some stock selecting I could not think of a better bunch of mentors. Thanks Fools!
coming soon: My Strategy to Get the Most from Motley Fool Stock Advisor