By now, everybody probably has heard about the octopus Paul picking winners of World Cup football matches. So far, it got right all the results of Germany. Today it picked Spain as winner of the final next Sunday. See the video of its memorable performance in CNN.
First thought: what a monumental charade this is! Second thought I had today at work: what if Paul was picking stocks for an investment fund?
The thought is not that out of the box: Burton G. Malkiel in his 1973 book, “A Random Walk Down Wall Street” (which I strongly recommend), suggested that a blindfolded monkey throwing darts to select stocks wouldn’t do worse than professional fund managers.
The Wall Street Journal went a step further and tried to prove the point. They did so organizing the 6-months Dartboard contest in 1988, a contest that continued along 14 years in more than a hundred 6-months periods. They didn’t use a monkey but the newspaper staff and they weren’t blindfolded. Nevertheless, the stock picks were quite random. See the explanation of that fun story in this article from Goergette Jansen a few months before the contest was to be finished in 2002.
So, how did the “monkey” do against the pros? Dartboard picks won the contest 39% of the times while pros won 61% of them. So, the pros got better results the majority of the time. Nevertheless, think that 39% of the times you would have been better off leaving your investments decisions to the darts, a monkey or octopus Paul (call it the way you want) than professional managers who get paid to maximize your returns… uh.
After those 14 years, pros racked up an average of 10.2% gain while the darts got a 3.5% gain (this is way better than my company-sponsored BBVA pension fund…).
So, next time you jokingly comment on Paul, think that you might as well ask him where to put your money and even get better results than when listening to the advice of the broker of your bank…