Friday, August 3, 2012

Zipcar Collapse Sinks Fool Portfolio

The Motley Fool's "Million Dollar Portfolio", which at present sits below its namesake threshold, is now not even beating the S&P 500 since the inception of the service. With the recent meltdown at Zipcar following the company's lackluster results and unexciting forecast, the service not only has a negative return but a return lower than the S&P 500 (excluding the dividends paid on the S&P 500, but not excluding dividends paid to the portfolio):

The two numbers for returns since inception are, respectively, the portfolio's total return (including both transaction fees and dividends paid) and the total return of the S&P 500 (excluding all dividends). As depicted in the image, this puts the dividend-excluded S&P 500 return 2.5% ahead of the Motley Fool-analyst-driven real-money portfolio over the life of the portfolio. While the portfolio's survival of the 2008 crash certainly impacts its overall return, this should not work against the portfolio's ability to generate a return that is better than that of the S&P 500. After all, the entire thesis of the Million Dollar Portfolio is that by carefully picking winners and systematically excluding losers, returns should crush those of the S&P 500.

And, yet ...
... not.

The MDP currently has a couple dozen holdings, which is rather easier to follow than the 100+ recommendations maintained by the Motley Fool's flagship newsletter Stock Advisor. Note that at the time that last link was published, MDP was actually ahead of the S&P despite being down. No longer.

The idea that investors get market-beating portfolio allocation instructions when they subscribe to MDP is just false. The possibility that MDP has concentrated its investment in diamonds in the rough that will be discovered later seems unlikely, as its dozens of companies should afford it plenty of opportunity to diversify. But, that's not what's going on. A few comments by the fund managers in the comments seem to suggest the managers aren't trying to implement Buffett's first two rules of investing (reminiscent of Hippocrates' admonition, first and above all to do no harm) but to make bets with other people's money (the $1m portfolio is a marketing tool, not the managers' own money) based on their impression of the risk-reward ratio. In other words, they're willing to put your money in peril on the chance of riding to the moon (which would attract more subscribers, ka-ching!). This is exactly what is hated in quarterly-results-focused fund managers, no?

Rather than assuming away regulatory risks (like at Bridgepoint (BPI)) and ignoring the direct competition available from everyone interested in entering a market with no intellectual property or trade secret barriers to entry (like at Zipcar (ZIP)), people entrusted to give the price-specific and allocation-specific investment instructions routinely handed out by the Motley Fool to members of the Million Dollar Portfolio subscription should be spending the time needed to understand businesses well enough to know them well enough to appreciate when they are screaming buys. Berkshire Hathaway's purchases of American Express, Coke, and preferred shares of Goldman Sachs (with warrants) and General Electric (with warrants) were made at times the market had turned on otherwise good businesses. Those companies aren't a buy at any price (something that Stock Advisor seems to ignore when it makes a recommendation, and especially afterward), but they were a buy at the right price. They were a buy because established income from known businesses had proven it.

They weren't newly-public news items like Zipcar, or privatization cheerleader heartthrobs like Bridgepoint. (Remember Prison Realty Trust, formerly trading under the ticker PZN before it was acquired by Corrections Corp. of America (CXW), when "everybody knew" private prisons were a "no-brainer"? Is for-profit mass-education a story much different than for-profit inmate warehousing?) Far from being solid investments, Zipcar hasn't made an annual profit yet and Bridgepoint is a commodity competitor in a market in which the governors of nineteen states have decided to drive down prices.

By focusing on imagined risks and hoped-for rewards, the Million Dollar Portfolio seems to view itself as pursuing "risk-adjusted" returns rather than focusing on businesses that produce solid returns. This may be how the portfolio has been seduced away from Warren Buffett's First Rule of Investing, and his Second.

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