How 45 different Best Ideas played out
In January 2021 Seeking Alpha asked Marketplace authors to write about their best idea.
In this article I will discuss the returns of these ideas: per category and on a risk adjusted basis.
Two conclusions: 1. Avoid growth stocks, 2. Best ideas from popular newsletter authors are on average unlikely to be better than other best ideas.
In January 2021 Seeking Alpha published descriptions of 47 best ideas in 2 best idea collection articles: here and here. These ideas include 2 ideas that were not related to stocks. I will not include these 2 ideas in my comparison in order to get an apples to apples comparison.
The 2 excluded ideas: why not suitable for comparison
One of the excluded ideas was VeChain USD (VET-USD), a crypto currency. I am not able to compute the exact return because I do not have price data for this instrument. But I think this idea did well.
From the beginning it was clear to me that this best idea competition was about stocks. This particular instrument is extremely volatile, much more volatile than the average stock. Therefore I do not think comparing this instrument with best stock ideas from the others is an apples to apples comparison.
The other excluded idea was a warrant on AerSale Corporation (ASLE) with ticker ASLEW from Chris DeMuth. I do not have exact data for this instrument but I think this investment increased more than 5-fold. If I had included it it would have been the best idea in my list.
The underlying stock ALSE had a return of 35% or so. Though the warrant was a great idea I find it difficult to compare with the other ideas. One of the reasons is again volatility.
Secondly, recommending a warrant instead of a stock is similar to adding leverage. For example, Safety in Value had an excellent idea that turned out to be the top performer. He could have beaten Chris DeMuth's idea using leverage. Simply increase your mortgage with $4k at 5% and invest it along with another $1k in his pick. IMO his idea was good enough for a much leveraged bet. I think the first 9 ideas would have had similar or better returns when combined with some leverage.
I checked whether it might make sense to include the underlying stock instead. Chris DeMuth did not present the underlying stock as his second best idea in his description in the first Best Idea collection article. After reading his earlier article my understanding is he mentioned the stock as his “best SPAC idea”. But, he also mentioned the warrant as the “best bet for an aviation recovery”. So, my conclusion is that also in that article he presented the warrant as his best idea for 2021.
Safety in Value: Unit Corporation
Before I continue with discussing the returns I want to say something about Safety in Value’s best idea: Unit Corporation (UNTC) with a 1-year return of 392%. His idea had the best return of all 45 stock ideas. Moreover, the return difference with the next best idea is large.
This stock was a microcap in the energy sector. So, it is an example of excellent timing of oil and gas price increases. But it is also a special situation. This was an OTC stock emerging from a bankruptcy. Companies emerging from a bankruptcy have motivated sellers: former lenders who have converted debt into shares. Once the selling is done mean reversion kicks in resulting in high returns. Joel Greenblatt has already described it in his book You can be a stock market genius. For small companies such a mix can be explosive for the stock.
I regret not having looked at his idea and not having invested in his idea. To my own defense and to give Safety in Value even more credits: Going through investing ideas from others may seem easier than finding your own ideas. But, in my experience, in practice, it is just as difficult as finding your own ideas. That is one of the reasons why I am rarely investing in ideas of others. But considering Safety in Value had the best performing idea I should show going through ideas from other people is something he is good at as well.
He is looking into blogs published on Seeking Alpha, at least he was doing that a year ago. If he thinks the blog presents a good idea he writes about if for Seeking Alpha PRO subscribers. Last year I wrote a blog about my best idea. He saw it, confirmed to me it was an excellent idea and mentioned it in his PRO article. BTW, here is my blog describing how it played out. That idea was the third best idea with a return of 204%. So, Safety in Value got it right at least twice.
How the best ideas performed
The other best ideas were the following: fuboTV (FUBO), Palantir Technologies (PLTR), Everi Holdings (EVRI), Elastic NV (ESTC), CuriosityStream (CURI), WaveDancer (WAVD) (formerly Information Analysis, IAIC), Tesla (TSLA), Tenet Fintech Group (formerly Peak Fintech) (PKKFF), Fiverr International (FVRR), Jewett-Cameron (JCTCF), Ceapro (CZO, Canada), ADMA Biologics (ADMA), Ganett Co (GCI), Genko Shipping & Trading (GNK), Hexcel Corporation (HXL), Plains GP Holding LP (PAGP), Brighthouse Financial (BHF), Valero Energy Corporation (VLO), Zedge (ZDGE), Live Nation Entertainment (LYV), Peabody Energy Corporation (BTU), Arbutus Biopharma Corporation (ABUS), AVITA Medical (RCEL), BEAM Therapeutics (BEAM), Corvus Pharmaceuticals (CRVS), Karyopharm Therapeutics (KPTI), VanEck Vectors Junior Gold Miners ETF (GDXJ), Sprott (SII), Firefinch (EEYMF), Gold Standard Ventures Corp (GSV), TransGlobe Energy Corporation (TGA), Helix Energy Solutions Group (HLX), Charah Solutions (CHRA), Viatris (VTRS), Annaly Capital Management (NLY), H&R Block (HRB), American Tower Corporation (AMT), Crestwood Equity Partners Preferred Share (CEQP.PR), BlackRock Science & Technology Trust II (BSTZ), ONEOK (OKE), Invesco WinderHill Clean Energy (PBW), ETFMG Primer Junior Silver Miners ETF (SILJ) and Mannatech (MTEX).
Investing is mostly a game of luck. Therefore, I do not want to look unfriendly to all these professional and hard working newsletter authors with some bad luck. Therefore, I will not present a table with returns for each author. Instead, I will only discuss summary statistics. I will also give returns of a few selected authors because otherwise it will be too difficult to make my point.
Before presenting the results I also have to make a disclaimer. I have tried to be very careful but might have missed certain special situations when computing returns, such as special dividends and spin-offs. For each idea the begin date is the trading day after the Seeking Alpha article (part I or part II) was published and the end date is one year later. My computed returns are based on closing prices corrected for dividends and splits.
I am using a one year window for computing returns for easier comparison with returns from other investors and funds. In addition, for many investors taxes and trading costs eat into returns for holding periods of less than a year, such as the period until 31 December 2021.
The categories in the table below were selected by the authors when they submitted their idea. I have computed averages and a risk/reward metric for all these ideas together and for each category. The Sortino ratio is the average downside below a certain required return divided by the standard deviation of the downsides. See also this article. To stay in line with other publications I have used 10% to compute the Sortino ratio. A high Sortino ratio implies ideas in that category have better consistency in the returns. So, it implies higher probability that the people with ideas in this category are doing something right, as a group.
Per category statistics for SA Marketplace authors’ best 2021 ideas (Source: own computations)
As shown the average return was 28%, which is approximately equal to the total return of the S&P 500 in 2021. However, 27 of these 45 best ideas performed worse than the S&P 500 in 2021. Furthermore, 21 best ideas had a negative return. So, best ideas from Marketplace authors can be very good, but only on a statistical basis.
Are best ideas from popular newsletters better?
One may think ideas of authors of popular Marketplace services would perform better on average. Those ideas would be from authors with a favorable position in this list. I believe this list ranks Marketplace services on revenue with at least oneexception. Let’s call this list the Marketplace Favorites List. I have not been able to do a full analysis because I do not have enough data for such an analysis. However, based on a superficial analysis the best ideas of authors of popular Marketplace services do not seem to perform better.
For example, last year my newsletter was low in the Marketplace Favorites List. Still my pick ended up as one of the best ideas. Safety in Value had a better position in the Marketplace Favorites List but he was still far away from a top position. Maybe he was somewhere halfway. The same could probably be said of Long Player (TransGlobe Energy Corporation, TGA, 161%). Yet, both ideas had an excellent return.
At the moment Laurential Research is number 61 out of 184 in the Marketplace Favorites List. Therefore, I do not think this author was in the top 30 or 40 last year. Yet, his idea (Firefinch, EEYMF, 246%) was had the best return except for that of Safety in Value.
The GeoTeam (Geo Microcap Insights) currently is near the bottom of the Marketplace Favorites List. Yet, their idea (WaveDancer, WAVD) had 130% return.
Now let’s have a look at authors that probably had a good position in last year’s Marketplace Favorites list.
Last year, I think Rida Morwa had the top position in the Marketplace Favorites List. However his idea was not very profitable. Also From Growth to Value (Fiverr International, FVRR, -62.23%) was probably someone with a high position in the Marketplace Favorites List. Yet, his idea had an extremely bad return.
J Mintzmyer, however, had a high position in the Marketplace Favorites List and his idea had a great return (Genko Shipping, GNK, 100%). KCI Research, currently number 15 in the Marketplace Favorites list, also had a great idea (Peabody Energy Corporation, BTU, 168%).
Summarizing, I think of the 10 best ideas with the highest returns out of my list of 45 only 2 were from authors with popular Marketplace services. I am not 100% sure, however, because I do not have last year's "Marketplace Favorites list". Two ideas of currently very popular Marketplace authors performed very badly. However, one such service may not have had a top position in the Marketplace Favorites list last year. One idea of another very popular Marketplace author showed a disappointing return but was still profitable. One very popular Marketplace author had an idea ending up as the seventh bestidea. And one author with a popular but not extremely popular Marketplace service had a idea that ended as number 4. So, when investing in best ideas from Marketplace authors it probably makes sense to ignore credentials of the author.
When we also look at the 2 excluded ideas note the following: Chris DeMuth Jr is very high in the Marketplace Favorites list and his idea performed great. However, almost certainly the author The Freedonia Cooperative of the other excluded idea had a low position in this list. I am not 100% certain but I think his idea also performed great.
This aligns perfectly with what is described in the free book Popularity - A Bridge between Classical and Behavioral Finance. Anything that is popular usually results in lower returns. A good question is the following: why are certain newsletters much more popular than others? Often, but not always, the answer is they focus on popular investments, in order to attract subscribers. Unfortunately, according to this book, popular investments (growth, volatility, etc) do not perform as well as unpopular investments.
And, keep in mind that returns do not tell the whole story. Most likely, many popular newsletters provide value for their subscribers in other ways.
Biotech and other growth stocks
When comparing Sortino ratio’s of the different categories it becomes clear growth investments (Biotech and Tech/Growth) performed much worse than the other investments. That is not a surprise for me. These stocks have often high valuations, negative cash flows and/or high inflow of external financing. Such stocks are well known to have much lower returns. See for example the book What works on Wall Street (4th edition), in particular chapter 14. Volatile biotech and other growth stocks are also popular investments.
Again, it is very well possible these newsletters on biotech and growth stocks provide good value for their subscribers, such as diversification opportunities. After reading the book on popularity (chapter 6), however, I think investors try to avoid anything that goes down more than the market. That means they underprice such investments and overprice other investments, such as biotechnology and other growth stocks.
I was one of these investors as well. About 5 years ago, I thought extremely cheap stocks of Japanese construction companies would take a beating at a large market draw down. I still regret not having bought these stocks.
Investors betting on growth stocks need to realize the odds are against them. There are exceptions, however. Sometimes a growth stock turns into a despised value stock. Biotech stocks that are trading below their current assets minus all liabilities (net-nets) are great stock market bets. But only when investing in many of them. Individually they may still perform badly.
Since biotech net-nets usually burn lots of cash even net-net investors have been avoiding them. But my impression is also that many net-net investors have changed their attitude towards biotech net-nets. Recently I have discussed 2 biotech net-nets: Astria Therapeutics (ATXS) and Achilles Therapeutics (ACHL). See here and here. Since I wrote about these 2 stocks Astria is up about 40% and Achilles is down about 10%.
Commodity, energy and value stocks
Stocks in categories Commodities, Energy and Value had on average excellent returns and good risk/reward metrics. There were not many ideas in the categories Commodities and Energy. When combining these 2 categories I think these ideas have not been as good as the Value ideas. Moreover, much of the abnormal returns in Commodities and Energy was from timing the underlying commodity prices. But I think only one of the authors in these 2 categories actually does this: Bull & Bear Trading. The others specialize in Energy/Commodity ideas. I guess they write about Energy and Commodity all the time. While I think commodity and energy stocks are good assets to own, I do not expect them to outperform year after year.
The best Marketplace ideas have probably great returns. However not individually, only on a statistical basis. To get good returns it makes sense to buy them all and sell them after a year. But only investing in the ideas in the Value category will probably result in much better returns. Another way to increase returns from a statistical Best Ideas strategy is buying all best ideas except for ideas in the categories Biotech and Technology/Growth.
Furthermore, I do not think only buying the best ideas of authors with the most popular Marketplace services will improve returns of a "Best Idea Portfolio". My feeling is best ideas that are "popular investments" from authors with popular Marketplace services will underperform on average, also based on the free book Popularity mentioned above.
I do extensive ranking of global stocks, according to several value strategies and combined value and momentum strategies. These strategies have excellent returns based on research published in public sources such as scientific papers. Therefore, I wondered which of these ideas is still cheap, according to my global rankings? Unfortunately none of them was cheap enough for me to describe for my subscribers.
However, at 0.5 CAD per share Ceapro Inc (also CZO in Canada) was among the best 25% in my global list of microcaps with very low trading volume. Because there were still hundreds of better stocks in this list it is not cheap enough for my subscribers. If you have the stock but do not have this list consider holding it for another year. At least, for most investors it is difficult to find and invest in another stock with with better statistical properties.
Seeking Alpha seems deaf for this criticism
Unfortunately Seeking Alpha refused to publish this. They have not communicated very clearly their specific problems with this article. The editor feedback did not mention any factual issues with this article either. The feedback was formulated such that it was clear to me that they did not want to consider it for publication even after a major revision. Nevertheless, I did the uphill task to submit a revision that addressed their two main points. The most important change was that I increased focus on the returns per category. Still they refused to publish this article, without giving any new arguments.
Their arguments seem to be that certain other best idea authors may not like this article and that SA is going to publish a similar article itself.
This was a competition. Anyone knew the results would be discussed. I think I have made my discussion respectful for everyone. No author should have a problem with this article.
For their second argument I have the following to say. About a day after submitting my article an SA employee approached me to check the share price of my best idea. I first computed the returns and then I wrote the article. So it seems if they were just starting to produce the article after I submitted my article for review. Furthermore, considering the editor feedback my view on this best idea competition is almost certainly totally different from the article SA is still writing. Moreover, with increased focus on the returns per category I have addressed this in my revision. I do not think Seeking Alpha will do anything similar, and I do not think they had that idea themselves either.
Furthermore, I think it is a high quality article. At least, there are important takeaways even when read 10 years from now. By refusing to publish it Seeking Alpha does not acknowledge this.
In particular, I have been advised by Seeking Alpha that returns do not matter much to build a successful newsletter. Therefore, internally this is known at Seeking Alpha. If they know this then why should it be a secret for readers of Seeking Alpha? Why should it be a secret that there are good reasons to believe the best ideas of popular newsletter authors do not have better returns? Isn’t Seeking Alpha there to help investors?
Lastly, in the editor feedback Seeking Alpha did not address my issues with this competition. It did not address this particular issue when I communicated it as a comment to the first Best Ideas collection article:
I can imagine that Seeking Alpha does not feel comfortable with this article. But Seeking Alpha, please listen to me:
You should not be aiming to run a dusty Soviet factory full of servile people writing tons of low quality articles.
To get great articles and stock ideas on your site you need to cooperate with creative, out of the box thinking people. Realize this is only possible if you can correctly deal with polite but justified criticism, such as I have given above.