We recently stumbled across a viral stock market related tweet from 2021 that asked, “What company is worth less than $10 billion today but you think could be worth $500+ billion in a few decades?” The author was looking for the next stock that had potential to “50x” (to return 5,000%), and queried his more than 400,000 followers for their best picks. He received over 700 responses and published a top 20 list.
How have those 20 stocks performed over the last two years? Absolutely terrible!
This tweet, and the engagement it received, offer a great case study in favor of indexing and avoiding the allure of finding the “next hot stock.” However, if you can’t resist, there’s a lesson in how to make a low odds bet in a smart way.
How the top 20 have performed
We looked back at the performance of each of the “20 top stocks” from the date of the tweet (July 20, 2021) through August 28, 2023. In a display worthy of the Worst Stock Picks Hall of Fame, the average return of each stock is a decline of 75%. Moreover, 10 of the 20 stocks have fallen by 80% or more! The best return, if you want to call it that, is -29%.
Here’s the full list:
On average, these stocks need to rise by 763% just to get back to their starting price from July 20, 2021!
Even if we removed the five worst performing stocks the average decline remains a dismal -68%. Plus, the return needed to breakeven would still be an astounding 324%. That’s just to get back to the price you paid on July 20, 2021, when this list was published.
All of that is to say that this is not a case of a few bad picks skewing the returns extremely negative. The entire basket of stocks was a dumpster fire.
What about the market?
The stock market as a whole peaked during the summer of 2021. A diversified Vanguard index fund, VT, which tracks the global stock market is down 2.30% since July 20, 2021. But that’s way better than being down 75%!
A $10,000 investment in the basket of top 20 picks above is worth around $2,500 today. That same $10,000 invested in VT, an index fund, is worth $9,770.
What’s the lesson?
The siren song of finding “the next Apple” or Tesla will exist until the end of time. But, there are a number of lessons we can take from the poor performance of the crowd-sourced portfolio above. Among them:
- Opportunities are economically harder to come by. Stocks don’t exist at “the ground floor” the way they used to. Pre-1990, companies like Microsoft and Apple went public so they could raise money to fund business development. Microsoft famously had only one private investor at the time of its IPO. Today, companies often go public to cash out founders or private equity investors who typically invested in the company at a much lower valuation than what the public is being given the chance to buy in at.
- In your quest to do better, you end up doing worse. Study after study proves this point: the vast majority of investors who attempt to beat the market end up doing much worse than had they just bought a market-tracking index fund.
- Don’t take financial advice from social media.
Making a dumb decision in a smart way
One of your best strengths is knowing your weakness. If you know you can’t resist the urge to buy individual stocks in hopes of finding the next big winner, there’s one main rule you should follow:
Index the vast majority of your portfolio, possibly as much as 95%. Then, with the other 5%, make your picks!
This ensures that at least 95% of your stock market exposure is going to track the market and deliver predictable returns. There will be no worse feeling in your financial life than looking back in 20 years and saying, “If I had just owned the total market I would have done so much better for myself.”
Don’t get in your own way.
Now, let’s say you do find the next 50x, and you only had 5% of your money invested, that equates to a positive impact on your portfolio of 250%! That’s pretty good.
If you don’t find the next 50x (far more likely), the MOST you will be out is minus 5%. While we still don’t necessarily agree with the approach, it’s at least a much smarter way to try and find the next 50x. Oh, and when you do go looking for your home run pick, you may not want to turn to Twitter.
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