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.