Tuesday, July 3, 2012

MDP matches its name again

This week, the Motley Fool's Million Dollar Portfolio ("MDP") finally clawed its way back to the value of $1m. The return of the portfolio hasn't exactly blown my socks off, so I don't recommend the subscription. On the other hand, they promise a refund if you are not satisfied so there's not a lot of risk to look.

One thing to keep in mind with the portfolio is that its management fees aren't reflected in the portfolio, as they are covered by the subscription charges paid by subscribers. In fact, the portfolio itself isn't really an investment as much as it is a marketing gimmick: people who feel $1,000,000 is big money are apt to trust that anyone with that much to invest (a) knows his stuff, and (b) really believes, as evidenced by risking the lot of it on the service's picks. Some of the picks and their allocations seem driven by emotional rather than intellectual governance, and the discussion on the boards suggests that aligned opinions are celebrated (so everyone feels better about their commitment). I haven't seen much evidence of serious debate about the merits of even controversial (read: losing) investments, so much as I have seen what looks like a mutual admiration society.

Using the Fool's "scorecard" feature to track my post-crash (e.g., from December of 2008 on) transactions, I was shown this note last month:
The conclusion I drew was not particularly flattering of the MDP service.

The service is good for people without the conviction to buy anything or the time to research it: it's probably better than nothing for those for whom the substantial subscription fee is not a material cost. Investors without six figures to invest will find their subscription fee and transaction fees prevent them from realizing even the (so far) lackluster performance of the services fund.

By concentrating investment in a few good issues whose stories are well understood, it's possible to do a heck of a lot more than barely eking akead of the S&P. Even accounting for the S&P-lagging share price performance of the internally-outstanding Berkshire Hathaway, and a few losers I picked up while playing along with MDP, I was recently treated to this:
This IRR has a few weaknesses – it doesn't account for things like the performance of uninvested cash, or the cost of margin – but it is an annualized return. It also allows investors to control how they will handle the impact of dividends (which can create strange issues when handled by ill-conceived defaults). Boosts like buying MTGE at $16.75 before it announced its first full-quarter dividend, and reinvesting AGNC tax-deferred in an IRA, help. But mostly the result comes from ACAS, AAPL, and GE purchases in the first quarter of 2009. Recent doubling of the AAPL position have helped: their annualized yield is quite nice (up >3% since April).

But hardly anything in the portfolio that drove those results came from MDP's recommendation list (I had AAPL before MDP was a tear in its marketing managers' eyes). Instead, its recommendations have dragged on the real winners, costing me precious capital in violation of Buffett's Rules #1 and #2.

The Motley Fool talks a good game on intelligent investing, but when it comes to selling subscriptions it seems to be peddling snake oil. And when it comes to analyzing things like the financial impact of share buybacks at American Capital, the fools seem to get it systematically wrong. (On that, see discussion here and here).

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