Monkeys vs. "Monkeys"
Ever heard or said the old line, "A monkey could do this job"? Well, according to a recent blurb in the WSJ London's Cass Business School (a study sponsored by Aon Hewitt) decided to go out and test that theory as it relates to building an index. Their findings state:
than a market value-weighted index of the type used by most investors.Bad news for investors, good news for primates? London's Cass Business School has found equity indexes built by "monkeys" produced higher risk-adjusted returns the past 40 years
Wait, built by "monkeys" you say? Why is the word monkeys in quotes? Are they surprised that monkeys fully crushed indices made by non-monkeys? I know all the finance monkeys here on WSO slay benchmark indices daily! Is the WSJ trying to start something?
Okay, after reading another piece on this study, turns out they meant actual monkeys. Sort of. But not really. As co-author Andrew Clare notes:
We programmed a computer to randomly pick and weight each of the 1,000 stocks in the sample; we effectively simulated the stock-picking abilities of a monkey.
Yeah, about that, what the researchers seem to have done, is have a research monkey program software to simulate an actual monkey picking stocks. But, there's no real monkey in the whole study! I say point to us! Assuming all credit is due to WSO finance monkey types - as it should be! - the co-author Clare goes on to say:
One of the implications of our work is that we should perhaps be benchmarking our fund managers against monkeys rather than against a cap-weighted index!
Damn straight we should be benchmarking to random finance monkey indices! I call this a win for all of us. Let's bring Casey the chimp out of retirement so finance monkeys can dominate regular monkeys!
tl;dr - There's a study about monkeys picking stocks, but not those kind of monkeys, well, at least not those kind of monkeys in reality. I then go on to say the word "monkeys" a few dozen times to thoroughly confuse everyone, then finally conclude that we're awesome. Totally comes together in the end.
well since it's a randomly picked portfolio, it's also probably equally likely the monkeys do worse. Extend the study for a few more years and see what the law of really really large numbers say.
Index is at 4, and you roll a die and get 5. Voila! You've beaten the index!
"The process was repeated 10 million times" - so it does suggest an underlying outperformance. The aritcle does have a point - the "index" is essentially an arbitrary portfolio, not a true control portfolio that fund managers out to be benchmarked against.
how is this news? haven't experiments like this been performed since the 1960's? ...
Are the portfolios they pick actually investable? What universe of stocks are they using? If they are picking random small stocks that appreciate in value, do they pick the quoted price, or a price that they actually could have transacted for? How large could you scale this for a multi-billion dollar institutional investor? Would they actually be able to buy all of these stocks without moving the market? This could just be due to having a larger weighting in smaller cap stocks compared to a market value weighted index.
Given the number of possibilities the market brings, 10 million, in my humble opinion, is nowhere near enough.
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