Stock Picking Cat Beats Experts
In the field of investing, there is a concept called “seeking alpha”. The idea is that you are smart, therefore your best approach is to make many smart investment choices. However, the facts bear out that active management nearly always loses.
In a nutshell, imagine the following scenario. 100 drunk monkeys throw darts at a list of stocks. Each picks 10 stocks. At the end of the first year, 50 of these portfolios have done worse than average, 50 have done better than average. We retire the 50 worse than average. At the end of the 2nd year, 25 of these have done worse than average, 25 better than average (its a phrase @Kean). If we repeat this a few times we have 5 portfolios that have beat the odds 5 years in a row. We now put on a shiny suit and market it to you the retail investor. “Our smart stock managers have been the markets 5 years in a row.”. You invest. But, you are really just investing in drunk monkeys.
Someone decided to put this to the test w/ a cat. You can read the full story here, but in a nutshell, a cat named Orlando would throw a catnip mouse onto a pad of numbers, and the owner would invest. The owner was competing against 3 teams of professional money managers.
Well, there’s more than enough foreshadowing in this article for you to guess by now the cat trounced the pro’s.
Now, i’m not advocating for drugging your cat and following feline investing strategies. I’m instead suggesting that maybe investing in the index is the best approach for you. These folks will set you on the right path.