Can a monkey with a pin outperform investment experts?

By Pete Comley

Did you know that some of the most consistently good stock traders don't read finance articles? They can't even read company accounts or speak English.

That is because they are monkeys.

In my quest to understand what the actual returns are for the real average UK stock market investor, I happened across a number of studies on the investing prowess of our primate cousins. They so much intrigued me that I ended up naming my whole book after them i.e. Monkey with a Pin.

To give you an example, back in 1993 the Swedish newspaper Expressen, tested the trading abilities of a monkey called Ola. They ran a competition over a period of a month with him pitted against one of the top professional traders.

As the pro, carefully picked his stocks and set limit orders to squeeze the last krona out of his trades, Ola picked up some darts and threw them into a copy of the newspaper. The editorial staff then dutifully executed Ola's trades. Guess who ended up with the most money at the end of the month?

If you think this is just a one off, I have found so many others examples that consistently show the same pattern of results with real or imaginary monkeys. For example the one that first got me looking into this was the performance of the "Monkey with a pin" entry in the UK Stock Challenge.

In this annual competition of 500+ serious traders, the monkey's five random picks usually beats two thirds of them. Last year he was in the top ten per cent of contestants again.

But the largest such experiment was conducted by the Wall Street Journal. They ran 147 competitions between 1990 and 2002, where each month they pitted the four top investment pros from Wall Street who picked one stock each, against a blindfolded member of the editorial team (pretending to be a monkey) and throwing four darts into a copy of the stock listing in the paper.

The data from all of the competitions has subsequently been analysed by academics. They examined three scenarios. They first assumed that an investor was regularly saving a fixed amount every month of $4. They then saved this in one of three ways, with these results:

 

The results were staggering. Not only did a simple monkey buy and hold strategy using the dartboard stocks beat a strategy that always followed the latest tips from the pros, it also beat a simple buy and hold index-tracking strategy.

So you are probably thinking how can this be? Why are our primate cousins so much better than us at investing? Is stock market investing really that random?

In the book, I discuss a number of reasons why our returns are never quite as good as we expect and this covers the obvious things like costs. However that does not specifically explain why random monkey stock picking appears to do so well.

I think the reason goes back to something called the Efficient Market Hypothesis, a concept made famous by Princeton University economics professor Burton Malkiel, in his 1973 book entitled: A Random Walk Down Wall Street. He argued that all available information is quickly factored into stock prices so that all stocks present equal chances for gains. 

But there are flaws in this theory and it is those that I think the monkeys are exploiting. Firstly the market does not always correctly value smaller companies where less information is available or verifiable. Therefore a monkey with his random stock picking may be more likely to include these in his portfolio.

There is clear evidence that the market over-reacts emotionally to both fear and greed and excessive volatility can occur in share prices - particularly in market crashes. The monkey's lack of appreciation of these helps him particularly avoid panicking and selling prematurely at a loss. Furthermore the monkey's innate ability to ignore the media and not get suckered into stories also helps.

So what does this mean for your investing?

I know what I'm going to do the next time the market puts in a big decline. I'm going to pin up the FT in the garage and throw about 40 darts into. That will then be my "monkey portfolio" for the next decade.

1. Gary E. Porter, 2004, “The Long-term Value of Analysts' Advice in the Wall Street Journal's Investment Dartboard Contest”, Journal of Applied Finance, 14(2), Fall/Winter.

You can read and download Pete Comley's book Monkey with a Pin for free from http://monkeywithapin.com