A Blindfolded Monkey Can Beat The Market
Disclaimer: The material in this article is purely educational and should not be taken as professional investment advice. Invest at your own discretion. Some external links in this post are affiliated.
There have been many studies that have shown animals can beat the stock market and beat out expert fund managers with PHD’s. Yes, you read that correctly, animals have beaten expert fund managers with PHD’s when it comes to portfolio returns. How is this possible ? I’ll explain.
It all started in 1973 when professor Burton Malkeil from Princeton University claimed that “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” in his book called A Random Walk Down Wall Street.
Well, the CEO of Research Affiliates, Rob Arnott stated that Burton was incorrect while speaking at a conference and stated that “The monkeys have done a much better job than both the experts and the stock market.”.
The company Research Affiliates published a paper called “The Journal of Portfolio Management” where the company randomly selected 100 portfolios containing 30 stocks from the largest 1000 U.S. stocks by market capitalization. They then repeated that process every year from 1964 to 2010 and recorded the results. The act of randomly choosing 100 portfolios was meant to replicate the act of 100 monkeys throwing darts at the stock pages of the news paper each year. The study found that on average 98% of the “monkeys” portfolios beat the weighted largest 1000 U.S. stock portfolio by market capitalization every year.
So, just by using this strategy of randomly selecting 30 stocks from the largest 1000 U.S. stocks by market capitalization, you can outperform the weighted largest 1000 U.S. stock portfolio by market capitalization about 95% of the time every year.
Why Does This Strategy Work ?
So, why does this strategy work ? The actual strategy obviously doesn’t have anything to do with monkeys or animals. This strategy works because of the smaller company stocks and value stocks outperforming the stock market over the period of…