Supernova Performance vs. Stock Advisor and Rule Breakers

Is Motley Fool Supernova Worth It?

One of the main questions I get from my readers is “Is Motley Fool Supernova worth it?” Given that Supernova only invests in stocks that were previously recommended in either Rule Breakers or David Gardner’s side of Stock Advisor, it’s reasonable to wonder whether you would be better off just buying a subscription to Rule Breakers and/or Stock Advisor (currently at a price of $299/year and $199/year respectively) versus shelling out ~$1500/year for Supernova.

The following analysis attempts to answer that question.

(Hi there, when you finish reading this, make sure to read my updated analysis here, as of June 2015.)

Background

Supernova was created in March of 2012. The idea behind the service was to create various real money portfolios based solely on David Gardner’s picks from Rule Breakers and Stock Advisor. In theory you get the benefit of a team of advisors who are able to pick the best of all of David Gardner’s prior picks, with more flexibility to buy and sell, and perhaps most importantly, the ability to provide allocation guidance in building these portfolios (for more information on Supernova, read my detailed review).

The Analysis

I wanted to tackle the question of “Is Supernova worth it?” in a practical, real world way. So I looked at every single monthly recommendation that Stock Advisor and Rule Breakers have made since Supernova’s inception in March 2012, and looked at how much money would an investor have if they invested $1000 evenly in each of those recommendations.

I did the same with Supernova Odyssey and Phoenix picks as well, so that I could do an apples to apples comparison using my mechanical investing methodology, for the sake of this analysis.

I also calculated how much the same investment in an S&P index ETF (specifically State Street’s SPDR SPY) would be worth. I chose the SPY because it is an actual vehicle that you can invest in, and so can be considered a true alternative to active stock picking.

Finally, I wanted to compare that with the actual returns that Supernova has achieved, per the official website.

The Results

Supernova Performance vs. Stock Advisor and Rule Breakers

The first thing you can see is that using my mechanical $1000 per recommendation methodology, both Supernova portfolios underperformed Rule Breakers and Tom Gardner’s Stock Advisor recommendations, but outperformed the overall Stock Advisor results as well as the David Gardner Stock Advisor recommendations.

The other thing that jumped out at me was that David Gardner’s Stock Advisor recommendations fared the worst. Given his outsize performance on the SA scorecard since its inception, it is surprising to see he underperformed his brother so drastically in the last 22 months. Does that mean David Gardner is losing his touch? I’m not sure that’s the right conclusion. David’s picks tend to differentiate themselves over a 3+ year holding period. With the picks in this analysis having an average holding period of less than 1 year, it might be premature to judge him that quickly.

Another quick observation is that every service outperformed their S&P benchmark, illustrating that there is a benefit to active stock picking, at least if you are following the Motley Fool.

At the bottom of the table I included Supernova’s official results, per their website. You’ll see their results are different than what I calculated, and that can be attributed to their allocation decisions, as well as a couple of sell decisions that they made, which my mechanical methodology doesn’t account for. Based on those returns, you still would have been better off just following Tom Gardner’s Stock Advisor picks, and even slightly better just following Rule Breaker picks. But again, Supernova offered much better results than David Gardner’s side of the Stock Advisor scorecard.

Factoring in Costs

None of the above takes into account the price of membership. The common rule of thumb is to keep your transaction costs to around 1-2% of your investments. That typically applies to the cost of commissions when you buy or sell a stock, but membership costs can be treated in much the same way.

So in my mechanical investing examples, what if you back out the cost of membership? At $3000 for Supernova ($1500/year for 2 years, approximately equal to the 22 months of trades I analyzed), this represents 4.4% of the 68K invested in Odyssey, and 6.4% in Phoenix, significantly higher than the recommended 1-2%.

Similarly, if you back out 2 years of costs for Stock Advisor ($398) this represents 0.9% of the invested amount; and for Rule Breakers ($598), it would be 1.3%. This is more in line with the guideline.

In that light, Rule Breakers’ performance lead (vs. the S&P) grows to almost 8 points versus Odyssey and 14 points versus Phoenix. And Stock Advisor’s overall performance versus Odyssey is now only 2.3 points lower, and actually outperforms Phoenix by 4.2 points.

Keep in mind this assumes you are investing roughly $2000/month which is not practical for many people. If instead you only invested $1000/month ($500 per recommendation), the membership cost eats even more into your return, and Supernova’s performance versus the other services suffers the most.

Conclusions

I want to preface my conclusion by saying that 22 months is not a very long time over which to judge the success of an investment, particularly when evaluating the Motley Fool, as their investment philosophy advocates holding stocks for at least 3-5 years. But I do think 22 months, with at least 44 recommendations in each service, provides enough data to begin taking a look.

In that timeframe of just under 2 years, the majority of which has been a bull market, each of the services performed very well. And if you compare the official Supernova results versus my mechanical approach for Supernova, their results are better and that can be attributed to the allocation decisions the Advisors for those services have made. So there is some value-add displayed there for sure. However their results vs. the other services are not as clear cut.

I think the only way to really answer the question “Is Supernova worth it?” is to factor in the size of your portfolio and the cost of membership. As the overall amount of money you have to invest gets smaller, the more the membership fee eats into your gains. Despite Supernova’s superior results, at a certain portfolio size, that cost becomes prohibitive and Supernova becomes “not worth it”. That being said, you can mitigate some of that cost by signing up for a long term membership, which drops the annual cost considerably.

My conclusion also ignores any of the qualitative factors involved in calculating the worth of the subscription, such as access to additional analysis and content (e.g. new missions like the recent Explorer mission). But on the basis of performance alone, I feel Supernova is more suited for investors with a larger portfolio.

If the market turns downward for any sustained period of time, perhaps Supernova’s portfolio management will be a real advantage and help buffer investors from prolonged underperformance, but that remains to be seen.

Of course, simply investing in the SPY ETF would have earned you nice returns as well, without any significant fees or commissions, and no time spent keeping up with the Motley Fool services. For many investors, this might be the best approach.

{ 8 comments… add one }
  • Frank February 22, 2014, 10:51 pm

    Great work as usual, Kevin!

    Reply
  • Joseph March 16, 2014, 11:13 am

    Thanks, as always, for this insightful analysis!

    Question about trades: do they ever close trades or are these all buy and hold (if not forever, but longer than this 22 months period)? How did you calculate the returns of open trades? (Marked to market, I assume.) And more importantly a practical question: What is a realistic allocation to these type of strategies? Realistically how many open positions do they have at any point in time?

    Finally an “accounting” question: in the paragraph starting with “At the bottom of the table I included Supernova’s official results, …” you come to the conclusion that their official results are still lower than Tom’s or the Rule Breaker’s. This doesn’t seem to be the case (based on the numbers)??

    Thanks again!

    Reply
    • Kevin March 16, 2014, 5:37 pm

      Joseph – good questions. When I say that Supernova underperformed Tom and Rule Breakers, I’m referring to the performance vs. the S&P. On absolute basis, you are right, Supernova comes out above, but relative to the benchmark, which I think is the most relevant indicator, they underperformed.

      They close trades occasionally. Off the top of my head I can think of 4 instances for Odyssey and only one for Phoenix. One was reducing the size of an existing position, one was due to the company being bought out, and the other 3 due to them losing confidence in the companies ability to outperform.

      Both Phoenix and Odyssey has 30+ positions at the moment. And both have a stated aim to always have at least 15 positions, but no maximum. They also sometimes add to their existing positions, so not every rec is opening a new position. My guess is that they keep it somewhere around 50 overall, but that’s just my hunch.

      Hope that helps!

      Reply
  • linda March 27, 2014, 1:10 pm

    what are your thoughts on mf pro thanks

    Reply
    • Kevin March 27, 2014, 8:05 pm

      Motley Fool Pro is a very good service. In case you missed it, check out my review here. Jeff Fisher is probably the best overall analyst at Motley Fool, and they provide a lot of high quality coverage in that service. They use shorts and hedges, so it’s not for everyone.

      Reply
      • linda March 27, 2014, 9:55 pm

        Really appreciate your very informative comments. I’ve traded options for some time and found your assessment very helpful.

        Reply
        • Kevin March 28, 2014, 12:41 pm

          Glad I can be of help.

          Reply
  • Patricia December 16, 2014, 7:21 pm

    Just stumbled onto this. Thanks for taking the time to break down your analysis.

    Reply

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