Why is bench marking our picks against an index useless?

Be weary of investment subscription sites that boast about their pick’s returns verses a particular index because quite frankly in the best case it’s nearly irrelevant and in the worst case it’s deceitful. We say nearly irrelevant because one could argue those picks are the opportunity cost of investing in the TSX Composite or S&P 500 index, or whatever index they benchmark against. One could also argue it validates the analyst’s skill in identifying under valued or long term growth opportunities. That’s where the argument ends because it’s not a level playing field. The subscription would have to present their selections in similar weightings to the weightings of the index. Purely for example let’s say the TSX market cap is made up of 50% in the Financials sector and 20% in Energy sector. Therefore, to compare apples to apples the selections would need to comprise roughly 50% of Financial stocks and 20% of Energy. They of course do not have the be the same ones as the constituents of the TSX in fact that would defeat the point. It would also be like comparing the Telecommunications sector against the Healthcare sector.  You should also be aware if their stated performances are assuming any dividends are reinvested because if they are, then they should compare their returns to TSX Composite TR which stands for Total Return, the regular TSX Composite does not include reinvested dividends and therefore can make a big difference in performance over time. Certain websites base their strategy on day trading options. Options are a form of leverage and therefore do not have the same risk and return profile as a stock. Lastly if a stock pick is underperforming and there is no potential for recovery the website may issue a sell recommendation, as we do here at Serpent Stock. This by design cuts the losers and keeps the winners, also known as survivorship bias, in their performance report however the indices do not have that luxury. In summary we believe it is pointless to compare our returns to a particular bench mark and prefer to disclose our performance simply as is and let you decide if our picks are worth your money.