Can you invest better than a blind-folded monkey?

You have to admit; there is something magically alluring about the world of stock picking, where fortunes are made by masters of the universe plying their trade in finding the next Apple or Amazon. An entire, multi-billion dollar media industry has emerged where the top stock gurus are revered like star athletes and average investors cling to their every word. Only, superstar stock gurus make a lot more money than athletes. 

The top money managers are very well paid, earning upwards of $20 million a year. They are supposedly able to identify, analyze and select winners from the vast universe of stocks in the major stock indexes. A good year is one in which the manager’s return exceeds the return of the index. A superstar money manager is one who consistently beats the index.


Stock pickers vs. the stock index

So, how are they doing? The results are not very flattering. Over a five-year period, from 2011 to 2016, only 43 percent of managers of large-cap funds were able to beat the S&P 500. The vast majority of them barely edged out the index. It gets worse for money managers who focus on the international markets--only 18 percent managed to outperform the international index.

For investors, this means that if you had invested your money in an index fund or ETF that tracks the S&P 500, you could have beat more than half of the money managers. And, your investment costs would have been a fraction of the 1 to 2.5% charged by mutual fund money managers.


Stock pickers vs. dart throwers

In fact, the likelihood is you could do just as well as a mutual fund manager by throwing darts at the financial pages. There are contests all over the world pitting dart throwing amateur investors against top stock gurus. The practice was popularized by Burton Malkiel, the author of “A Random Walk Down Wall Street.”

Malkiel, argued that the market and stock prices are completely random, making it virtually impossible to beat it with any consistency. He had always insisted that “a blind folded monkey throwing darts at the financial pages could select a portfolio that would do just as well as one carefully selected by experts.” That was the inspiration for the annual Wall Street Journal Dartboard Contest, which started in 1988.

Out of 100 contests, the stock pickers came out on top 61 times to the amateurs 39. While that would seem like a towering advantage over the amateur stock pickers, the stock experts failed to beat the Dow Jones Industrial Average (DJIA) in half the contests. In other words, if a passive investor simply invested in the 30 stocks that comprise the DJIA, he would have beat the stock experts half the time. 


It’s what the academics have been saying for decades

Although the results of dart throwing contests may not be accepted as scientific evidence, they do support the academic theories posed over several decades by academics (several of whom are Nobel Laureates) comparing active management of stocks to passive management. Their data clearly shows that investors, who insist on trying to pick stocks, stand no better chance of beating the market than investors who invest in low-cost index funds.


Author: Vitali Butbaev, Velstand Capital Founder
Vitali Butbaev