[credit creator=”‘I’m thinking it might be a good time to start shorting on opposable thumbs’. Photo: Getty / Buddhika Weerasinge”]
Would you like an attractive bonus scheme that offers fruit treats thrown over a fence and regular outings on the rope netting?
Would you thrive in a challenging work environment that includes regular puzzles, such as retrieving apple slices from a tennis ball can?
Trading might be for you.
Researchers in Britain who pitted the investment strategies of monkeys against the market in an experiment have concluded that the monkeys, over time, were better at picking stocks.
The traditional theory that an infinite number of monkeys typing would eventually write Shakespeare was the starting point. But it needs to be clear that there were not an infinite number of monkeys at work — only a comparatively tiny group of 10 million.
And while there was no harm to any animals in the experiment — they used computer monkeys — there was extensive damage to the claims of investment houses to have detailed, well-thought-out strategies for where to put money.
In summary, when the monkeys chose stocks at random from an index of the 1000 biggest US companies each year between 1968 and 2011, the monkeys did significantly better than the market.
The following chart shows just how consistently the monkeys outperformed the market.
To be fair, the investors didn’t always fail. There’s some upside:
But do monkey always win? Figure 7 shows the proportion of random simulations that beat the Market-cap index on a rolling three year basis. Once 26 again, there are a number of periods when the Market-cap index performs well. Between 1972 and 1975; for most of the period between (1988) and 1992; and then again between 1996 and 2001, the Market-cap index outperforms 100% of the random simulations.
But, the researchers add, the monkeys “outperform the Market-cap index over three year overlapping periods 60% of the time.”
The detailed research paper looks at a range of investment strategies, but the monkey factor makes for some enjoyable passages and charts with delightful titles. This one shows the spread of the monkeys’ results with a starting $100 investment. That green dotted line on the left is the market cap.
And the discussion:
The worst performing index in this context is the Market-cap index which produces a terminal wealth value of just under $5,000. The black line in the Figure represent the distribution of terminal wealth values produced by the ten million monkeys. The grey line in the Figure represents the cumulative frequency of the terminal wealth values produced by the monkeys. Half of the monkeys produced a terminal wealth value greater than $8,700; 25% produced a terminal wealth value greater than $9,100; while 10% produced a terminal wealth value greater than $9,500.
One in four monkeys turned $100 into $9,100, while the market-cap index took it to $5,000.
If your super balance is looking a bit short, maybe it’s time for a trip to the zoo.
The experiment was part of an ongoing appraisal of various way of appraising market performance at the Cass Business School in City University London. The abstract’s here and you can download the full paper here.
[credit creator=”Watching a Bloomberg terminal? Photo: Getty / Buddhika Weerasinghe”]