The iBillionaire Index: Is It Worth to Follow the Most Successful Investors?

iBillionaire3On Friday October 23, 2015 the iBillionaire Index was two years old.

As we can read on the iBillionaire fact sheet: “The iBillionaire Index allows individuals to track the highest-conviction S&P 500 stocks held by leading billionaire investors. It is a long-only U.S. equity index that tracks the investment choices of the most consistently successful billionaires in the United States, based on data gathered from regulatory filings with the SEC. It is equal weighted and rebalanced on a quarterly basis.“

Investors are chosen according to strict standards: “iBillionaire only identifies and examines a universe of billionaires who have built their fortunes in hedge funds and investing. It utilizes a rules based methodology to select billionaires for inclusion within the strategy.“

The fact sheet doesn‘t mention if the index includes dividends or not, which is a strange omission. I suppose it does since the web page uses the word ‘return‘ (see next table) and not capital appreciation.IBillionaire1The iBillionaire web page no longer compares the index performance with that of its benchmark, the S&P 500, so I include the following data:

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As you can see, the iBillionaire has gained 8.73% in its first two years while the S&P 500 has gained 22.89% with dividends and 17.92% without them.

How is it possible that a portfolio comprised of stock selected by the most successful investors performs so poorly?

Best investors have a success rate (in the sense that stocks they pick outperform the market) of about 60%. This is very high for a single investor since it means that good choices are 50% higher than bad choices, in relative terms. But probability laws make it very difficult to design a portfolio from different portfolios with a 60% success rate that in its turn has a 60% success rate as well.

As the aphorism goes, perfect is the enemy of good.

My bet is that in the long term, the iBillionaire return will be similar to that of the S&P 500. This means that the iBillionaire will very probably outperform the market next year. After that it will do better sometimes and worse other times but the overall return will be the same as for the market as a whole.

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