Buffalo Wing-Powered Zebras
Cover Story, by Mark Robertson, Managing Partner February 1st, 2009
Our traditional contest now has two years in the record books. The challenge is simple. Select five stocks, starting on our national holiday, Groundhog Day -- and take care of the portfolio going forward.
Mark Robertson and his herd of Zebras took home top honors in the 2008 Groundhog Challenge. Holdings included Buffalo Wild Wings (BWLD), Cognizant Technology (CTSH) and PetMed Express (PETS). The Zebras delivered a 11.2% rate of return for the 2008 contest. The Zebras finished strong in the 2007 contest and have now posted an annualized rate of return of 14% in the face of extreme market challenges during Groundhog I-II.
2008 was a stock market stampede, crumpling many investors in its wake. 0-of-9964 funds generated positive returns during Groundhog 2008. But three of our participants did! 2008 Groundhog Challenge Champion Mark Robertson was joined by Ken Kavula and Saul Seinberg in trampling a formidable field of groundhoggers (and average investors.)
The Zebras turned $1000 into $1115.25 during one of the most challenging years in stock market history. That’s a rate of return of 11.2% while the overall market DECLINED 40%! 31-of-46 (67.4%) participants managed to beat the market. (Only 27% of all equity funds outperformed the market during Groundhog 2008.)
It was truly a photo finish. Down by $102 with two days remaining in the 2008 Groundhog Challenge, Ken Kavula’s contest portfolio closed the gap by $84 in a single day. The subject of hunting came up in playful banter with last year’s champion, Steve Parham and his dog Bo, during the 2007 campaign. In this case, the Zebras were clearly the hunted. As the year came to a close, my colleague Kurt Kowitz observed, “You don’t even own a dog, much less one as handsome as Bo.”
Our traditional contest now has two years in the record books. The challenge is simple. Select five stocks, starting on our national holiday, Groundhog Day — and take care of the portfolio going forward. There were no limitations on trading except that we account for capital gain liabilities to encourage switches to be effective. Realized losses are accounted as offsets in a simulation of tax-based incentives.
We didn’t dwell on the long-term nature of the contest in early 2007 and we didn’t have to for 2008, either. Our participants clearly make their choices with a longer journey in mind. No day trading. No penny stock adventures. Carefully considered selections. Relatively low turnover.
For 2008 … 31-of-46 participants (67.4%) outperformed the Wilshire 5000! (Only 27% of stock mutual funds did.) During a year when the market receded some 40%, our group winner — the Bower City Investment Club of South Central Wisconsin, achieved a rate of return of negative19.5%, a feat that may seem empty until you realize that it’s approximately 20 percentage points better than the general market! The best stock mutual fund delivered a return during our contest period of negative 2.4%. Yes, folks, that’s the best result from nearly 10,000 funds. It’s important to keep our achievements in context and Bower City is helping to lead the way.
Groundhog 2008 Leaderboard. Here are the (16) participants at the top of the standings for Groundhog II.
Punxsatawney Phil’s Prediction?
It’s become our Groundhog Creed: " … a group [of investors] that heeds the lessons of Graham, Babson and Nicholson has at least one leg up on the crowd and a better than average opportunity to generate exceptional returns."
The average groundhog has achieved a lifetime “alpha” or relative return of +3.7%. I think Punxsy Phil continues to forecast “Spring Ahead” for our hogs.
A Few Moments with … Bower City Investment Club
MI: Congratulations, Susan Maciolek (and Bower City) on winning the group category (2008) of the Groundhog Challenge. The club is off to a solid start in the all-time standings for the Groundhog. What was the inspiration for founding Bower City?
Susan: The club was founded in 1994 by twenty women who knew very little about investing. They felt the need and interest to learn more so they could be informed investors. It seemed like a good alternative to relying on brokers (or husbands!)
MI: Bower? Does the club also play euchre?
Susan: Janesville, Wisconsin is the Bower City or City of Trees.
MI: How about a favorite long-term investing moment or memory for the club?
Susan: A shining moment would have to be when we transcended $200,000 in portfolio value! (Not the recent trend) However, of greater importance is the education we have earned. It keeps us from panic in down turns in the market. We continue to do our research and invest regularly, adding to our portfolio monthly.
Bower City Investment Club of South Central Wisconsin. Front row: Sharon Fitzpatrick, Nancy Becker, Martina Tse, Susan Maciolek, Laurie Marsh, Sally Ward Second row: Teresa Wasiljew, Mary Ann Greene, Mary Downing, Barb Cisler, Beth Drew, Julia Walters, Sue Chwala, Janet Miller. [Absent: Carol Hatch, Carol Dieterichs (both in Florida and missing the sub-zero fun and frolic!!)
MI: Can you describe the stock selection process that you used for the Groundhog Challenge?
Susan: We looked at our portfolio and chose the five stocks with the combination of highest projected annual returns and excellent quality ratings. We check Manifest Investing to confirm the “blues” and make sure.
Peer Performances
The champion Zebras are a tribute to hall-of-fame small company stock picker, Ralph Wanger. The selection criteria for the Zebras includes a minimum growth rate of 12%, high quality, a PAR near the upper end of the sweet spot and a relative strength index near 30 in an attempt to identify stocks that are potentially oversold. The most successful selections included PetMed Express (PETS), Buffalo Wild Wings (BWLD) and Cognizant Technology (CTSH).
Ken Kavula also places heavy emphasis on small companies and was boosted by the performance of Varian Medical (VAR) near the end of the contest period.
Spokane’s John Bruntlett has two appearances near the top of the leader board. His 4th place finish is joined by the #3 (#17 overall) group entry, his Mutual Club of Cheney. Quality Systems (QSII) has been a stellar performer for John as well as “Mid-Michigan favorite son”, Neogen (NEOG).
There must be something good in the stockpicking water of South Central Wisconsin, because that’s home to Dan Horinek (#5) of Madison, Wisconsin. Dan also enjoyed the performance of BWLD and a late surge from FactSet Research (FDS).
Shelly Stokes of neighboring Minneapolis is drinking the right water in God’s Country, too. Shelly’s 2008 finish combines with a leader board finish in 2007 to rank among the Top Ten for the all-time relative rate of return. Shelly has consistently chosen stocks that have outperformed the benchmark while they reside in her Groundhog portfolio and she ranks among the accuracy leaders at the 2-year mark.
All-Time Accuracy Icons. We define accuracy as the number of picks that outperform the general stock market index. In other words, a selection with a relative return greater than zero. Saul Seinberg is our all-time leader and two investment clubs rank among the top six. Ken Kavula and Dan Horinek have turned in admirable results for Groundhogs I-II.
Finding Alpha?
It may be a small sample — but the results continue to be intriguing. We all might want to revisit the column on the “Wisdom of Communities” (June 2008). Others will recall my Better Investing columns about “Places Where Ideas are Born” and my belief that we can all be better because we’re in this together, bonded by the common ground and principles of NAIC founder George Nicholson, Jr. Those alphas (relative rates of return) shown in the accompanying figure are nothing short of massive if they continue.
We’re blessed to be among friends who love to explore and share.
Finding Alpha? The average Groundhogger has a compelling relative rate of return vs. the general stock market since the inception of our traditional contest.
The Clarity of Our Groundhog Future
We know better than to dwell on the results of a couple of years. We also know that past performance is, well, past. The success may extend because we’re dealing with a group of investors who build portfolios with carefully-considered expectations in mind.
We welcome the clubs, groups and more individuals as the field continues to expand. If you or a group of your friends are interested in joining the party, send an email to markr@manifestinvesting.com and we’ll be glad to answer any questions and get things started.
There is expanded coverage of the results and all Groundhog dashboards are available on the MANIFEST Forum. All individuals are welcome to participate and we’re grateful for the groups beginning to join us by the herd, buffalo wing-powered, indeed.
Mark Robertson
Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.