The Motley Fool runs some of the most popular stock-picking services in the world.
Investors can sign up for services like Stock Advisor and Rule Breakers to build a strong, diversified stock portfolio and continue to receive new stock picks every month.
Of course, if you’re going to sign up for a stock picking service, you want to make sure the stock picks will beat the market. If you could simply invest in an S&P 500 index fund and get the same returns, there’s no point in paying for a service.
With that said, we will be taking a look at The Motley Fool’s stock picks to see how they perform when compared to the S&P 500.
The Motley Fool offers upwards of 20 different stock-picking services. For our purposes, we will be focusing on Stock Advisor.
Stock Advisor is The Motley Fool’s original stock-picking service and likely the most popular.
For only $199/year, members can get access to dozens of stock recommendations annually.
Are these picks worth paying for?
Let’s see how they perform.
The Basic Comparison – The Motley Fool vs. The S&P 500
Let’s start with the obvious – The Motley Fool’s claims.
If you land on a sales page for Stock Advisor, you will see a comparison of the program’s performance relative to the S&P 500. At the time of writing this (September 2023), the Stock Advisor touts returns of 510% compared to 132% for the S&P 500 over the same period.
This data is calculated by averaging the returns of all stock picks since the program’s inception and shows that Stock Advisor picks more than 3X the returns of the S&P 500.
Is this legitimate, and is there more to the story?
Read on to find out.
Measuring The Motley Fool’s Performance
The Motley Fool has always been transparent with their track record. As a Stock Advisor member, you can find a record of every stock pick the service has ever made.
Simply navigate to the “Recommendations” section of the members’ area to find a table of all of the recommendations.
It’s worth noting that in 2023, the company introduced the Recommendations Screener alongside the track record.
In the past, the Recommendations table was organized by date, with the latest recommendations showing first. Each recommendation was accompanied by:
- The recommendation date
- The stock price at the time of the recommendation
- The returns since the recommendation was made
- The returns compared to the S&P 500
The Recommendations section is now organized by rank, with the highest-ranked stocks at the top. The rank represents the conviction behind the pick. For example, if you were to only buy 5 stocks, you would likely buy the top 5 by rank. If you were to buy 10, you would buy the top 10 by rank.
Each pick in the table is now accompanied by:
- The date of the latest recommendation
- The current stock price
- The 5-year return
Stock picks can also be filtered by market cap, revenue growth, stock price, and a variety of other factors.
Essentially, the “Recommendations” section has turned into more of a stock screener than a track record, which is much more user-friendly and gives members a better understanding of which stocks they should buy at any given moment. It’s easy to identify the best stocks and/or filter the recommendations to the ones that work best for your personal strategy.
It also helps members better understand a stock’s performance over a relevant timeframe of five years. The Motley Fool is very clear about the fact that their recommendations should be held for five years or longer unless a sell recommendation is issued.
The previous approach of showing the return since the recommendation date worked very well for older picks but may have scared investors in the short term during bearish market conditions.
Fortunately, a track record of all picks can still be accessed, and that is the date we are going to work with.
We’re going to go over some of this data and discuss a few other considerations when comparing The Motley Fool’s Stock Advisor performance to the S&P 500.
Does The Motley Fool Stock Advisor Beat the S&P 500?
We’ll keep this answer short and sweet. Yes, The Motley Fool Stock Advisor picks have beaten the performance of the S&P 500 since Stock Advisor’s inception.
Below are some interesting insights we pulled from the Stock Advisor track record from the first picks in 2002 to September 15, 2023.
The Motley Fool Stock Pick Performance
- Average: 858.89%
- Median: 81.15%
- Minimum: -98.87%
- Maximum: 27823.97%
- Average: $160 Billion
- Median: $29 Billion
- Minimum: $52 Million
- Maximum: $2.7 Trillion
- Average: 1.15
- Median: 1.12
- Minimum: -1.26
- Maximum: 2.98
- Average: 15.91
- Median: 27.01
- Minimum: negative
- Maximum: 330.12
- Average: 0.70%
- Median: 0%
- Minimum: 0%
- Maximum: 7.07%
- 36% Information Technology
- 20% Consumer Discretionary
- 13% Communication Services
- 10% Health Care
- 8% Industrials
- 8% Financials
- 5% Other
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The Motley Fool vs. The S&P 500: Considerations
If you want to follow these picks and achieve similar returns, there are a few things to keep in mind.
The Motley Fool stock picks are focused on high-growth companies in burgeoning sectors.
Many of these stocks could be considered higher risk when compared to index funds or so-called “safe” stocks.
If you want to replicate the success of the Stock Advisor portfolio, you need to stick to the principles that make these picks work over time.
You can’t simply replicate a small part of an investment strategy if you want it to work. You need to understand the full picture.
Let’s get to it.
Investing Time Horizon
Time is a critical component of any investing strategy as well as the stock picks that encompass that strategy.
A stock that may be a buy with a 6-month time horizon may be a poor investment with a 10-year time horizon. Similarly, a stock may be a great buy with a 10-year time horizon and a poor buy with a 1-year time horizon.
Take Apple, the biggest publicly traded company in the world, as an example. It has been a top-performing stock over the past couple of decades, but it dropped over 25% in 2022. It’s now up over 50% in 2023.
Stocks fluctuate. If someone tells you to buy a stock, you should always consider the time horizon of the investment thesis.
In the case of The Motley Fool’s stock picks, the time horizon is five years or longer.
The Motley Fool’s stock picks are intended to perform well over periods of five years or longer. They may have bad months or bad years. Unless the company issues a sell alert, you should keep the original time horizon in mind.
If you are easily shaken out of positions, you may end up selling yourself short. Let’s go back to the Apple example from above. If you had bought and sold it in 2022, you would have lost money. If you held through the downturn, your position would have been profitable by 2023.
This isn’t to say you can’t benefit from The Motley Fool’s stock picks if you have a shorter time horizon or lower risk tolerance. You will, however, need to create your own rules to determine how you will manage the stock picks (i.e. sell any time you are down 10% and repurchase when the stock sets new highs)
The success of The Motley Fool stock picks are not solely attributable to the team’s analysts being right 100% of the time.
They are not right 100% of the time. Some picks flop.
The success is due to diversification. Diversification provides exposure to different companies and balances out the risk associated with each individual stock.
Diversification ensures that picks with negative returns only account for a fraction of your portfolio.
It also ensures that you have exposure to stocks that will perform wildly well in the future.
The Motley Fool recommends that investors hold a minimum of 25 stocks.
This gives you exposure to different companies in different industries, helping you maximize upside and control for risk.
For context, here are the returns of 20 of the recommendations made in 2018, five years ago (as of September 15, 2023):
If you put $1,000 into each stock, you would generate total profits of $22,980, representing returns of ~115% (beating the S&P 500).
If you invested in only a couple, you may have picked the losers and missed the exceptional winners.
If you want to have success with The Motley Fool’s stock picks, you need to diversify.
Lastly, it’s important to discuss the volatility of the Stock Advisor’s stock picks.
In the world of investing, risk and reward are usually negatively correlated.
- Higher potential risk = higher potential reward
- Lower potential risk = lower potential reward
Take treasury bonds, money market funds, and high-interest savings accounts as an example. These are generally considered lower-risk investments. At the time of writing this, you can get 4-5% interest on your cash with these investments (which is the highest rate in over a decade).
Compare that to the S&P 500, which has returned upwards of 18% this year.
Compare that to a stock like META (formerly Facebook), which is up over 140% this year.
In 2023, the riskier investments have paid off.
In 2022, that wasn’t the case.
Low-risk investments were yielding 2-4% interest, while the S&P 500 ended the year down ~18%, and META ended the year down over 60%.
Risk and reward are correlated.
If you want to find stocks that return 100%, 1,000%, 10,000%, or more, you will also have to weather the storm during periods of decline. Stocks do not always go straight up.
Many of The Motley Fool’s stock picks experience shorter-term volatility before performing well in the long term.
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To sum things up, The Motley Fool’s Stock Advisor stock picks have a 20-year history of beating the S&P 500.
The success is due to great stock picks, longer-term holding periods, and proper diversification.
As is the case with any investment strategy, you should also consider your own personal financial needs and situation before blindly following anyone’s stock picks. With that said, The Motley Fool has a strong track record of being one of the most credible stock picking services in the industry.
Read our in-depth reviews of Motley Fool services below to learn more: