| Is a Monkey Portfolio Better? |
Have you heard of the proverbial Monkey Portfolio. Surprisingly, it was an experiment conducted in the US using a monkey. A monkey was asked to throw darts at random on the prices page of the Wall Street Journal and a portfolio was created by including all the stocks on which the monkey's darts fell. The collection of stocks became known as the Monkey portfolio.
What was more surprising was that when the performance of the Monkey Portfolio was compared with the performance of fund managers in the US, the Monkey Portfolio actually outperformed more than 85% of the US fund managers apart from beating the major indices in the US. What are the issues that arise from this experiment and what do they mean to an investor trying to selecting a portfolio management. Let us look at some popular myths that arise from this experiment and the relevant answers :
Myth : Active Portfolio management is
useless since Monkey Portfolios can outperform 85% of them
Reality : Skill lies in identifying the top 15% performers.
Myth : Beating the market is more a matter
of chance than a matter of design.
Reality : Beating the market is what differentiates the men from the boys. Peter Lynch the
fund manager of Fidelity Magellan Fund consistently beat the major indices for 10
continuous years, a feat unparalleled in US fund management history. Warren Buffet has
earned a return compounded of over 22% for his investors over the past 35 years.
Myth : 85% of fund managers are less skilled than a monkey in stock selection
Reality : While this is statistically true, what needs to be considered is that this outperformance could have been more by chance than by design
Myth : Buy and hold is a better strategy for any investor.
Reality : A buy and hold is definitely good as long it is a long run play and the investor has researched the fundamental strengths of the stock. However, mutual funds provide a medium for uninformed investors to participate indirectly in short term profits.
Myth : Blind investing is more effective than in-depth research.
Reality : The only sure way to lost your shirt is to do blind investments. Naive investors realized that in 1991, again in 1994 and once again in 1999. No point in repeating the mistakes of the past.
So in a nutshell what does it imply. Don't get carried away by the Monkey Portfolio argument. Don't get carried away by your illiterate neighbor who became a millionaire on the markets overnight. Don't get swayed by portfolio managers who promise you sky-high returns. William Sharpe had a valid point when he said that it is difficult to beat markets since they are efficient. But the answer is not to go for a monkey portfolio. The answer is to select the right portolio manager. Click here to find out how to go about selecting a portfolio manager.
T S Harihar
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