Investor Minute
The Time a Team of Professional Stock-Pickers Was Beaten by a Cat
Back in 2012, the U.K. based, Observer newspaper, decided to test the performance of their panel of professional stock-pickers. In a three-way contest, they pitted the trio of investment professionals against a team of finance students, and a house cat named Orlando.
According to the story, at the start of the year each team was given an imaginary £5000 (about $5,700 USD) to invest, hypothetically, in five companies from the FTSE All-Share index. Every three months, they had the option of exchanging any of the five stocks, as long as they replaced them with others from the same index.
Writing for the Observer, Mark King said that while the professionals used their decades of investment knowledge and traditional stock-picking methods, the cat selected stocks by throwing his favorite toy mouse on a grid of numbers allocated to different companies in the same index. There was no mention of how the students made their choices.
Through the first three quarters of the year, the professionals seemed poised to win the contest, but in the fourth quarter, they decided to hold onto such “sure bets” as British Gas and Imagination Technologies, both of which went on to decline by double digits.
Orlando the cat, however, continued to make trades, which were fortunate enough to propel him into the lead for the entire year.
About the lesson learned, King wrote, “The result indicates that the ‘random walk hypothesis’ popularized in Burton Malkiel’s A Random Walk Down Wall Street, is perhaps truer than we thought.”
Malkiel famously demonstrated that share prices move randomly because of new information, making stock markets essentially unpredictable.
In 2012 the market went through several significant corrections followed by dramatic recoveries. Even looking back with 20-20 hindsight, it’s hard to pinpoint exactly why stocks performed the way they did. No wonder the experts got it wrong.
The Observer missed a big opportunity with its yearlong demonstration. They should have added one more animal to the contest—a goldfish. One that makes no stock picks. If they had given that goldfish £5000 worth of the S&P 500 index and he had swum around all year making no changes, he would have beaten the cat’s hypothetical returns by 18% (Orlando “made” 10.8% for 2012. The S&P 500 made 13%.)
Many people believe that investing for retirement is mostly about making the right stock picks. But disciplined, diversified asset allocation helps reduce risk in your pursuit of long-term investing success. Your strategy should be part of a broader plan carefully tailored to your situation, one that considers the unpredictable nature of global markets. And then you need a trusted professional to help you navigate the emotional ups and downs that come with investing, holding you accountable to do the right thing no matter how you’re feeling.
No cat or goldfish can do all that. Let us guide you. Make an appointment today for a free phone consultation.