Stock Picking Cat Beats Experts

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.

6 Comments on “Stock Picking Cat Beats Experts

  1. A couple observations:
    1) By your analogy, the system is essentially random, as the winnowed list of drunken monkeys is predicated on nothing more than chance (and my own investment track record would largely bear this out…). But if that’s the case, what makes you think couch potato is better? After all, any index is simply a collection of underlying equities so how is the chance any different? If indexes “generally go up”, then it stands to reason that most individual stocks in the index also would go up, no? Of course, most could go down and the index could be pulled up by a few ‘super’ performers, but I don’t think that’s what you’re suggesting. I suppose there is more risk in picking just one stock (because you could pick a bum one)…i.e., the safety is simply in spreading the risk over multiple stocks. But if it’s true that any attempt at logical portfolio curation is a game for drunk monkeys, then there’s no reason to believe couch potato would be any better than my own collection of stocks that I picked when I was drunk. And in fact, a better option would likely be to pour a few fingers of bourbon and simply buy DJIA to spread the risk even wider.
    2) Notwithstanding the above, I think the overall premise is misleading because if I’ve learned anything from my years of investing, it’s that (barring a few exceptions) you can’t think of equities as ‘good’ or ‘bad’. Some perform better than others over a certain period of time, yes, but stocks by their nature go up and down. If you don’t sell when you are up, it can go down. Even indexes do this. Timing is at least as important as what you pick. Look at GME…is that a good stock or a bad stock? So, it may be fine to let the cat that’s tripping balls pick your stocks but you still need a drunk monkey to tell you when to buy and dog to tell you when to sell.

    • over a long (many year) time horizon, the stock+income investment market grows at a very fixed rate.
      by investing in the market as a whole, and ignoring the urge to cherry pick winners, you outperform the rest.

      the numbers suggest that if you pay 1% management fee to some mutual fund, that over the long haul the best it can do is 1% worse than the average.

      further, the concept of market timing (getting in and out at the right time) is the flawed concept. THe long haul investor who invests what s/he can, into the broadest exposure, at the lowest fee structure, wins the most in the long haul. As soon as you think you know more about a specific stock than others, you are the ones the smart money is making money off of.

      Fidelity did a study, and to their chagrin, found the best investors were dead, followed by forgotten:
      https://wealthydiligence.com/best-investors-are-dead/

      there was an inverse correlation between active decision making and success.
      the more you talked to a fidelity sales agent, the less money you made (and the more money fidelity made in fees).

  2. So, what you’re really telling me…is that basing my investing strategy on Kenny Rogers’ advice is…bad?
    “You gotta know when to hold em, know when to fold em, know when to walk away, know when to run. You never count your money when you’re sittin at the table, there’ll be time enough for counting when your May CPE calls have expired itm.”

    • right singer, wrong song.
      if you want 4 hungry children and a crop in the field, well…

  3. I sit here wishing I had read the blog all the way to the end before investing 30K in booze to get the 100K worth of monkeys loaded enough to throw the 2K worth of darts around my house causing 250K in damage while hoping they can pick a winner when all I had to do was put the money on the index. To add insult to injury, the cat also ran away.

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