What do a cat, monkeys, and an octopus have in common? The answer is that they all beat industry experts in outfoxing the market and predicting future events.
Renowned author Burton Malkiel notes in his classic book, A Random Walk Down Wall Street, 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”. In fact, these monkeys and animals seem to do even better than professional money managers at times, urging the question: why do we rely on money managers when animals can outfox the market better than they can?
Still thinking that the far-fetched statement in Malkiel’s book is metaphorical, or merely a joke? When a group of 100 monkeys was brought together and given darts to throw at the stock pages of a newspaper, the average monkey outperformed the market by 1.7% per year. In addition, Lusha, the Russian circus performing chimpanzee, chose 8 out of 30 companies to invest in and outperformed 94% of Russian bankers over a 3-year investment period. These esteemed monkeys performing so highly in the market, demonstrate that expert fund managers touting their great expertise may be choosing with the same odds as these animals.
Lusha the stock picking monkey
Even a cat, Orlando, outperformed a group of industry professionals as well as a group of high school students in a UK stock picking challenge. By tossing a toy mouse into a grid of numbers designating different companies, Orlando illustrated that while humans may be the apparent superior species, we may be at fault when choosing which companies to invest in.
An aspect of all companies chosen by animals across the board was the high amounts of small-cap companies these portfolios contained, meaning that the higher amounts of small-cap and value companies would yield greater returns than large-cap companies, exactly in line with the research findings of Professors Fama and French outlined in their 3-factor model. So, while these animals may be acting on instinct, just as humans tend to when investing based on the emotional nature of the game, there is still an academic thread linking the success of these financially prolific creatures.
Animals have even shown to be gifted at forecasting future events in general, as Paul the octopus had maintained consistently accurate picks in the Winner of the Football World Cup. The octopus correctly guessed all of Germany’s victories in the 2010 World Cup games and also correctly guessed that Spain would win the final—all picks that seemed very unlikely. Thus, Paul serves as another example of how knowledge and chance may be the same when choosing winners and losers in the market, or, in the World Cup.
Paul the prophetic octopus
You may call it luck, you may call it genius, or you may call it fate, but these animals do show how little a role financial knowledge really plays in forecasting the market at all. And just to bring home the point more forcefully, we are not claiming that animals make better investors in general, but merely that portfolio returns are asymptotically normally distributed, i.e. that they follow a random distribution. If investing was really based on cerebral prowess and superior intellect, an event like Lusha beating 94% of Russian equity fund managers over a period of 3 years should never happen. But it did happen, and as an investor you should refuse to pay the outsized salaries of active fund managers and instead stick with low-cost index fund portfolios. These portfolios should subsequently be tilted towards the risk premiums which Professors Fama/French unearthed in their academic research, thereby following what Lusha and Orlando did by sheer serendipity. It is time to fire your outrageously paid money manager!