In a retelling of the monkeys-throwing-darts claim made in the classic A Random Walk Down Wall Street, a Norwegian TV channel apparently brought together a bunch of professional stock pickers, an astrologer, two beauty bloggers and a herd of cows to create a portfolio of stocks.
While the selection of stocks for the human groups – including the beauty bloggers who did not even know the name of one of the country’s biggest companies – was straight-forward, the portfolio for the cows was selected based on where they dropped their faeces.
A Financial Times reporter, Robin Wigglesworth, tweeted about the exercise. Moneycontrol could not independently verify the details of the experiment.
The idea behind the experiment -- which ran for three months and benchmarked the performance of the portfolios versus the market index – as well as similar ones done in the past, is to test whether a random portfolio of stocks could do as well or better than an actively-researched one.
What were the results of the Norwegian experiment?
The astrologer did the worst, with his portfolio under-performing the market by 1.9 percentage points.
The pros, with a 7.3 percentage point outperformance, faced tough competition from the cows who did about as well, leading to a lot of plaudits for the herd’s leader, Gullros, who was dubbed the star of the show.
Image courtesy: twitter.com/RobinWigg
But it was the beauty bloggers whose portfolios beat the index by a full 10 percent.
The episode brings into focus the subject of whether picking a winning stock portfolio is a matter of skill or random luck.
The debate was ignited by Princeton economist Burton Malkiel in his classic A Random Walk Down Wall Street, who claimed that “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.”
Malkiel’s theory was not that blindfolded monkeys are as skilled as experts, but that stocks tend to behave randomly in the short term, and that any additional returns derived by a portfolio would only be gained by assuming additional risk (or volatility).
For instance, with experiments involving random, or animal selection – besides cows and monkeys, cats and rats have also demonstrated their stock-picking abilities – the selection of stocks is usually equal-weighted. This means each stock gets an equal proportion of the portfolio. In effect, compared to a market index that tends to be dominated by large stocks, smaller stocks get more weightage. Smaller stocks often tend to do better than large ones but face more volatility.
The other point to note is that such experiments have a survivorship bias. Create enough number of random portfolios and a good number will happen to beat the index. In the Norwegian experiment, the performance of the astrologer’s portfolio would quickly be forgotten but one would remember the performance of the cows and the beauty bloggers.
Sure enough, closer home, an experiment by Firstpost to create two random “monkey” portfolios showed one did well but another did not.
In fact, the presenters of the show also carried out a twist at the end, claiming that their own portfolio had trumped all four contestants, only later revealing that they had created 20 different ones, and chose to display only the best-performing portfolios.
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