From E.M. Forster’s Aspects of the Novel
:
Another distinguished critic has agreed with Gide—that old lady in the anecdote who was accused by her nieces of being illogical. For some time she could not be brought to understand what logic was, and when she grasped its true nature she was not so much angry as contemptuous. ‘Logic! Good gracious! What rubbish!’ she exclaimed. ‘How can I tell what I think till I see what I say?’ Her nieces, educated young women, thought she was passe; she was really more up to date than they were.
And Giles Bowkett’s Let the System Design Itself
And it literally happens like that. If you’re building design-first, you’re saying, “The system will do XYZ – I’ll put that here.” But just because you know it’ll do XYZ, you don’t necessarily know how or where, and deciding ahead of time imposes an arbitrary and unnecessary structure on your code. So then you have a file called XyzFile, which is supposed to do XYZ, and then you have other code elsewhere in the system which actually does XYZ, and it’s in some other file, because the design you imagined will always be different from the design which emerges. It’s like coding in Java. There’s the structure of your actual program, and the structure that Java requires you to accommodate. That second structure is just unnecessary mental overhead, and the bigger your system gets, the more wasteful that overhead is. You’ll have a structure that emerges naturally, whether you want to or not. It’s as inevitable as gravity. You might as well just let the macro follow the micro, like it’s supposed to, and get the good design which emerges naturally as a byproduct of that process.
Forster uses the anecdote to point out how the meaning of the work emerges from the act of writing, much in the same way that Bowkett illustrates how good design, if good design exists at all, naturally emerges from the act of writing the code.
And perhaps in this connection exists a new mantra for agile programming: how can we know the software’s design until we see how it’s coded?
One Asian and European mini-crash, a monster fed cut, and one stimulus package later, here’s the carnage for my 2008 contest picks: down -11.05%, and in second place. Of the collective picks in the contest, only one stock—that blue chip of widows and orphans, PetMed Express Inc (PETS)—is up a stunning 3.14%. On my own picks, my best two—Berkshire Hathaway (BRK.B) and Buffalo Wild Wings (BWLD)—are down just a couple of percent.
Here were my 2008 stock picks for this year’s family stock contest. We take the closing price on 12/31/2007, so the current streak of eight straight losing days for the NASDAQ put us all in a big hole.
| Stock |
Starting Price |
YTD |
| Berkshire Hatha Class B Ord Shs |
4736.00 |
-6.78% |
| Mindray Medical International Ltd |
42.97 |
-8.03% |
| PowerShares Water Resource Portfolio |
21.40 |
-6.45% |
| Buffalo Wild Wings Inc |
23.22 |
-7.97% |
| Mueller Water Products Series A Ord Shs |
9.52 |
-10.82% |
| Central European Distribution Corp |
58.08 |
-5.35% |
| Cognizant Technology Solutions Corp |
33.94 |
-9.81% |
| Grant Prideco Inc |
55.51 |
-1.44% |
YTD: down 7.08%, and the family pickers are down 6.18%.
I picked these with a little less analysis than I normally do before making a trade, and perhaps relied a little too much on the Motley Fool community recommendations as a screening tool to find eight I liked. I had briefly considered ISRG, but passed on it as too pricey (turns out it is in fact down almost 16% YTD). I picked PHO based on Paul Kedrosky’s love of water (and predictions that “blue is the new green” for 2008, meaning that environmental talk will turn from global warming to the implications for water.
BRK.B appears to be a safe port in down years. The rest are just small to midcap stocks that I think have the potential to appreciate significantly if the market does turn around.
In 2007 my extended family had a stock picking contest. Seven of us picked eight stocks over the New Year’s weekend and invested a hypothetical $100,000 per person evenly distributed, with $12,500 split among the stocks.
Collectively, this represented a starting universe of 53 stocks, funds and ETFs (three stocks were picked twice). The complete list of stocks and performance can be found here.
The overall results were fairly impressive based on most vanilla benchmarks. The total return of the portfolio was 15.82%, beating the S&P 500 by 9.9%, the DJIA by 9.39% and the NASDAQ composite by about 6%, but trailing the NASDAQ 100 by 2.85%.
Edwin J. Elton and Martin J. Gruber’s “Modern Portfolio Theory and Investment Analysis” says that you can achieve optimal diversification with a portfolio containing 20 stocks, after which adding additional stocks reduces the risk only marginally. The seven of us each did a little diversification within our local universe of eight stocks, and at a higher level, the life situations and demographics of the seven of us—spanning six decades and half the country—appeared to create additional diversification. Although none of this was a rigorous application of modern portfolio theory, in most cases some amateur thought was applied to attempt to diversify.
One question is raised: could you base a fund on the premise of not only diversification of stocks, but diversification of stock pickers each attempting to act rationally? Or is that just the definition of an index fund?
Highlights
Best stock picks: Nintendo, (+145.6%), Amazon (+141.4%), Apple (+132.9%), Southern Copper Corp (+122%) and China Mobile ADR (+103.4%).
Worst picks: Compucredit, (-74.7%), Chicos FAS (-56.1%), Bear Stearns (-44.84%) (2 picks), Citigroup (-46.23%), (2 picks), and McGraw Hill (-33.2%).
Another interesting note is if all the picks that two people had in common—Johnson and Johnson, Citigroup and Bear Stearns—had been rejected based on groupthink, the overall return of the portfolio would have been 21.1%. This is probably just coincidental, but it also might indicate that popularity of a stock in such a contest can indicate a bubble. Or touts finally getting the word out to the typical retail investor.
Selected Returns
Individual Returns of Pickers
| Mrs Firebones |
+44.25% |
| The Sis-in-law |
+39.76% |
| Yours Truly |
+16.18% |
| Brother #1 |
+7.04% |
| Brother #2 |
+4.60% |
| Mom |
+4.08% |
| The Nephew |
-5.20% |
My 2007 Picks
| Berkshire Hathaway Class B |
+32.36% |
| Devon Energy |
+36.97% |
| eBay Inc |
+7.83% |
| Emulex Corp |
-17.45% |
| Vanguard Pacific ETF |
+8.75% |
| Nice Systems Depository Receipt |
+10.32% |
| Tele Norte Leste ADR Reptg 1 Pref Shs |
+47.64% |
| Matsushita Electric Industrial ADR |
+3.03% |
I missed big-time on Japan and the Pacific, choices all based on punditry and a desire to go global to boost returns (since I thought domestic would only be up 4-5%).
Lessons Learned
Let your winners run. A couple of participants commented about their past common mistake of selling a winner after a small gain, say, selling Apple after a rise from $50 to $80 and missing out on the $80 to $200 run. Taking a look at the portfolio of the winner, you can see this in action:
| Abercrombie & Fitch Co |
+9.00% |
| Johnson & Johnson |
+2.61% |
| Boston Scientific Corp |
-31.99% |
| Medimmune Inc |
+69.00% |
| Nintendo Co Ltd Depository Receipt |
+145.61% |
| Apple Inc |
+132.90% |
| Costco Wholesale Corp |
+31.70% |
| Medtronic Inc |
-4.85% |
Nintendo and Apple more than compensated for the Boston Scientific loss. Had Nintendo and Apple been sold after 60% gains, the actual 44.25% winning return would have dropped to 24.43%. This is something that most investors learn eventually—sell your losers and let your winners run—but retrospectively reviewing a contest like this shows why.
Global matters. Again, hard to draw a conclusion from a single year, but the top 3 pickers had 29% portfolio exposure to international stocks and funds; the remaining 4 pickers had only around 9% exposure.
Eight stocks are not enough to consider yourself diversified. Two of the three poorest performers had significant subprime exposure, with 25% of their stock in financial services. Of the top 3 performers in the contest, the financial services exposure was only 4.17%, and that single stock (Goldman Sachs) was the only one in the collective portfolio to dodge the subprime bullet. This isn’t a hard and fast lesson—the contest rules which mandated equal investment in each pick magnified errors in diversification. For a stock picking contest, this is okay; for creating a real portfolio, it’s not.
In the upcoming year, we have five pickers so far: my, Mrs Firebones, Firebones Jr., The Nephew and The Nephew’s Bride-to-be. Later, I’ll post their 2008 picks (with December 31, 2007 closing price). Given the down market so far this year, this should make for an entertaining ride.
