In mid-July, we published our list of the 100 best finance blogs. Dan Solin, who has blogs on US News & World Report and the Huffington Post, had quite a bit to say about our breakdown.
In our original article, we put forth the criteria for creating the list–quality, value, originality, accuracy, and popularity–before stating that Insider Monkey would be withheld from the rankings.
If we were to be included in any user’s own personal reading list, it would have to be because of the market-beating strategies we offer our subscribers.
Yes, a 34.2-percentage point outperformance in a little over eleven months’ time.
Too good to be true, you may ask?
Between 1999 and 2009, this same strategy beat the market by 18 percentage points per year.
Dan Solin’s comedy of errors
On HuffPo last week, Mr. Solin put forth a rebuttal of this list, titled “A Bogus — and a Good — List of “Best” Financial Sites.” You can see it here in all its glory, but after pointing out the earth-shattering observation that “Anyone with a computer can post a financial blog,” Mr. Solin takes a left turn, and states emphatically that “Mr. Mann sets forth his flawed premise for making these selections.”
As mentioned above, one would reasonably expect that Mr. Solin’s issue with our “flawed premise” had to do with five criteria we used to compile the list. However, to assume this would be to assume we live in a world where logic reigns supreme, because directly after articulating this critique, Mr. Solin takes aim not at these criteria, but at the market-beating hedge fund strategy itself.
In short, he claims that we did not “spend much time elaborating on the basis for this “belief,” which is understandable,” adding that “If Mr. Mann identifies the “best hedge fund managers” by looking at their past performance, his advice is on shaky ground.”
Error No. 1: The last time we checked, the track record of a particular stock picking strategy has nothing to do with how a list of the best financial blogs is compiled.
Error No. 2: If Mr. Solin would have read onto the next sentence of our analysis, he would have seen that we expressly stated “This is a low frequency strategy that invests in 15 best small-cap ideas of the best hedge fund managers and it is updated quarterly,” and a link to this page was given, which explains the details of our strategy, and why it has worked very well in the past.
Explain like I’m five!
In the style or Reddit’s popular ELI5 (explain like I’m five) subreddit, let’s see if we can explain why investors should have hedge funds’ best consensus small-cap picks on their radars.
We’ll use a baseball analogy.
An average MLB hitter typically hits safely in 25% of the times he’s up to bat.
If you’re looking to learn how to become a better baseball player, you’d never want to copy a batter that is simply average, hitting .250. You’d be better off learning from the best MLB hitters, like Miguel Cabrera, who hit .330, or Mike Trout, who hit .326 last season.
These are the hitters who one should study, just as the best picks of the best hedge fund managers are the ones that everyday investors should pay attention to.
Poking holes in Mr. Solin’s argument
Judging by Mr. Solin’s comments, he’s leaning toward a version of the efficient market hypothesis. Generally speaking, EMH is based on the premise that it is statistically possible to beat the market by a very small margin for a very long time by happenstance.
Under such an assumption, our aforementioned small-cap hedge fund strategy managed to beat the market by 18 percentage points per year over a 10-year period by sheer coincidence. What is the probability of this?
If we hold that market returns are normally distributed, there is a 14.7% probability that one fund can beat the market by 1.05 standard deviations. The market’s standard deviation was 17.1% per year between 1999 and 2009.
Beating the market by 18 percentage points for a single year is an accomplishment, but 14.7% of the time, this can happen by chance.
Beating the market by 18 percentage points annually for 10 years is a different animal. You have to be unbelievably lucky. The probability of this happening randomly is 0.00000047%.
Now, this is an approximation, but simply put: you don’t really need to be a statistics guru to figure out that beating the market by 18 percentage points per year for a decade can’t be the result of pure coincidence.
In other words, if there were 1 billion monkeys picking stocks by throwing darts, only 4.7 of them would be able to match or exceed our performance.
But wait, there’s more
That’s the historical performance though.
Insider Monkey’s aforementioned strategy will also have another year of spectacular performance. Through August 5th, our picks returned 57.8% vs. 23.6% for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
The probability of this happening by pure coincidence is less than 5%. The combined probability of beating the market by 18 percentage points per year for 10 years, and then beating it by 34 percentage points for another year is now almost 1 in 5 billion.
Good luck finding 5 billion monkeys to throw darts!
Final thoughts
The truth is that markets aren’t that efficient after all, and the evidence is mounting to support this conclusion. Our strategy beat the market because hedge funds know how to dig for information that gives them an edge over sheepish index investors who blindly buy good and bad stocks.
After all, any fool has a 50% chance of beating the market. One in 2,000 monkeys can beat the market by a small margin for eleven years by chance.
What Mr. Solin doesn’t understand is that beating the market by a large margin isn’t as easy as beating the market by a small margin. Finding a couple thousand monkeys is easy. Finding 5 billion monkeys? Not so much.
Disclosure: none
