“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,” Burton Malkiel said in his best-seller ‘A Random Walk Down Wall Street Back’ in 1973. This apocryphal claim was supported by a report released by Research Affiliates, which tested this theory on 100 monkeys portfolios of 30 stocks each out of 1000 stocks and discovered that 98 out of 100 portfolios outperformed the market between 1964 and 2010.
Isn’t it quite a figure? With this, most of the ordinary stock investors now are embedded with beliefs that random stock selection from a list of stocks would perform better than highly-paid humans. Everyone seems to agree that monkey or robots’ monitoring indexes outperform human fund managers.
Now if you are thinking about adopting a monkey and beating the market instead of hiring a fund manager, BEWARE!
Investors believe they have located their own monkeys to do the work for them, but they haven’t because a professional or fund manager merely selects the largest and most valuable stocks on the market whenever the indexes are re-set. That’s not the same as picking anything at random. The blindfolded monkey concept worked because only a few large-cap stocks make up for a large portion of the market. It’s the 80-20 rule, which states that 20% of stocks hold 80% of the market cap, and 80% of stocks hold 20% of the market cap.
So, our blindfolded monkey will mostly pick small-cap stocks, which are generally growth stocks and perform better than the biggest and most valuable stocks over the long run. But at the same time, they have a much higher risk too because they’re more volatile so, your chances of failing are high. This is the law of nature ‘A child grows faster than an adult but has low immunity and can easily catch diseases.’
Of all, if you want to commit your assets to someone, I believe that a fund manager will make a better job than a blindfolded monkey. A fund manager is comparable to a surgeon in an operating room. Though the surgeon performs the essential surgery, he is helped by assistant surgeons, anesthetists, nurses, and other support personnel. Similarly, the research team, junior fund managers, and an operational team help the fund manager. The fund manager, like a surgeon, has access to the most up-to-date information, data, and analysis to guarantee a successful surgery.
So, the whole saga of monkey’s throwing darts can conclude seven things:
- Even for experts, it is impossible to consistently outperform the market but on the other hand, they can avert massive losses in a challenging market.
- As the experts keep reminding us, time in the market matters the most. In the medium to long haul, good companies will outperform average companies. In the short run, even terrible companies can give you a big increase. So yes, skill matters in the long haul.
- Random picks from a volatile gathering of thinly-traded stocks can be risky. For larger than market returns, we have to take greater risks, and here you should trust the experts.
- The monkeys are supposedly not so smart to know about the Business cycles but, an experienced fund manager will definitely help you navigate the uncertainties.
- Different Sectors perform well at different times so, it is your fund manager who will help you in the sectoral rotation of funds.
- Different investors have the different risk appetite, and their investment would vary according to the risk one is willing to take, thus the stock selection would largely depend on that and probably we can’t give monkey lessons on Risk Appetite.
- Lastly, as much it is important to pick stocks it is also important to monitor and rebalance your portfolio, we are not sure about the monkey doing the job.
Though a monkey may be able to offer you a higher return with even higher risk and without any brokerage fees a fund manager will always keep your money safe and grow it slowly and steadily and can help you minimize the possibility of financial loss.
Written by: Suraj Bansal
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