Those reindeer are good

First results have been reported and boy, those reindeer are some good investors. Apparently, a couple of economists had too much mulled wine last November or nothing better to do during lockdown than to take a bunch of reindeer and let them pick stocks from the pages of the Wall Street Journal. They distributed the pages of the Journal on a field in New Hampshire (the economists work at Dartmouth) and noted, on which stocks the reindeer put the points of their hoofs.

They did that in order to test if reindeer are better stock pickers than members of US Congress, a group of investors that often have inside information on regulation but no insider rules to prevent them from trading on this information. I won’t go down that rabbit hole or reindeer den because the results are always the same: Even though members of Congress have inside information, they still don’t manage to outperform the S&P 500 or benefit from that inside information.

Instead, I want to focus on something else that is reported in the first dispatch of the results. The researchers reported the performance of the stocks and ETF picked by reindeer and compared them to the top picks as published by analysts at top investment banks in the United States. In total, the portfolio of 68 analyst top picks entered a competition with the 41 stocks picked by reindeer and the S&P 500. 

The study notes that the reindeer are momentum traders that exhibit significant herding behaviour since they picked stocks that did well in the 12 months before and focused strongly on Covid winners like healthcare and tech stocks. Only one reindeer seemed to be a contrarian investor picking Chevron amongst other stocks – a particularly remarkable pick given Chevron’s contribution to global warming. Only two of the ten reindeer participating in the study seem to be financially literate enough to know about the benefits of diversification and selected ETFs instead of single stocks. 

Sector composition of reindeer portfolio

Source: Belmont et al. (2020).

Stocks were picked in November and December and performance was tracked beginning 40 days after they were picked to match the disclosure period for US members of Congress. Thus, the portfolios were effectively tracked starting in 2021. And so far, the reindeer seem to be doing quite well compared to the analyst top picks. In the first month, the reindeer portfolio beat the S&P 500 by 4.9% or 77.3% annualised while the analyst top picks underperformed the S&P 500 by 0.1% or 1.6% annualised.

However, it seems as if the reindeer mostly benefit from their herding behaviour and do not exhibit skill in picking individual stocks. Once the differences in industry composition between portfolios are eliminated, the reindeer portfolio underperformed the S&P 500 by 1.7% or 19% annualised. The analyst top picks, meanwhile, showed stock picking skill insofar as they beat the S&P 500 on an industry-adjusted basis by 1.0% or 13% annualised.

The problem in practice, though, is that you can’t eat industry-adjusted returns, but you can eat total returns – and reindeer. I for one would choose the reindeer.

Performance after one month

Source: Belmont et al. (2020).