Monkeys Picking Stocks

[theBruiser500]

I've heard that someone got a bunch of monkeys together and had them throw darts at a list of stocks. They then compared how the companies selected by the monkies did to how companies choosen by top stock people did. The monkies did better.

If this is true, how can people have a job picking stocks? Can people actually pick stocks at better than random or is this just an illusion? I know some people have done better than random over the years, but if you have millions of people buying stocks then naturally some of them are going to be up...

[GeorgeF]

I doubt your monkey story (try training a monkey to throw darts, turds maybe not darts), but it is true a random selection of stocks will likely do better than a selection chosen by experts. It is a bit more complicated as if your random selection contains all auto stocks you portfolio will perfom more or less like GM. One thing portfolio managers can do is create portfolios of stocks that are not correlated with each other. Needless to say people do not invest in mutual funds because of the correlation, they pick the one thats got the juice. You are better off with an Index fund than attempting to game the market. If you have alot of money (millon $) even the tiny expense ratio of an index fund adds up ($5000/yr), so you might just buy stocks outright. I would also point out that there are many indexes (broad, narrow) to choose from and how you allocate funds between stocks(which index), bond (long term, short term, gov, corp, junk) ,cash (US$, C$, euro) and any other asset class cannot be answered by random selection.

I suggest you read 'random walk down wall street'.

"how can people have a job picking stocks?"
You sell fishing lures to attract fishermen, not fish.

The job of a money manager is to attact money. What they do with the money is another story.

[plj8624]

"how can people have a job picking stocks?"

Because people are irrational.

[theBruiser500]

So, I have some very smart friends who pick stocks, and I gather from this message board Ray Zee picks stocks, and I just read a thread where a smart person named adios was talking about picking stocks... Both of you are saying that all of these people are foolish to believe they can pick stocks successfully?

[adios]

It's just some foolishness I participate in /images/graemlins/smile.gif. My viewpoint is and Ray keyed me in on it, is that there are a lot of stocks that don't get very much analyst coverage or no analyst coverage at all and those are the stocks that present the best opportunities. Also Dave has had some recommendations that have done exceedingly well.

[BadBoyBenny]

[ QUOTE ]
but if you have millions of people buying stocks then naturally some of them are going to be up...

[/ QUOTE ]

http://www.tilsonfunds.com/superinvestors.html

Here is Buffet's counter arguement to your statement, it can be found as an appendix in later versions of the Intelligent Investor.


I think it is silly to argue that no one can beat the market by skill. You don't need extra information or ESP. Some people will be able to do it by analyzing the same information that everyone has a little better and more patiently. Also they need a good concept of risk managment and some intuition of when things look good but smell bad (value traps, etc.) However, most of us can't do it, and because a proper savings plan and a low cost index fund are a way for anyone to beat the average investor, it isn't worth the risk that 10 years down the road you find out you aren't the investor you thought you could be.

I have a small portion of 'play' money in an online discount brokerage account, I like to try analyzing and picking stocks to hopefully someday make money (even swing for the fences sometimes) but I do it more for education and entertainment. The money I am counting on to retire is in low cost equity funds in a ROTH and a 401K.

I think most money managers success is measured in the short term, and they have to think short term, and that is why they end up underperforming or matching market performance with higher costs.

On a somewhat tangentally related issue I've always believed that the efficient market theory is garbage. To me it just seems to say that the average investor performs in the average. People then read this to mean that the ones who beat the market are always lucky rather than good and just happen to have landed on some edge of a bell curve. Does anyone want to give me a counter arguement?