Can Monkeys Pick Stocks Better than Experts?

by Jason Unger

We’ve spent plenty of time explaining why investing in passive, low-cost index funds will out-earn actively managed funds in the long-run, and that most fund managers can’t even outperform the indexes they’re trying to beat over time.

The underlying theme of these posts is that stock market “experts” aren’t really experts at all. They may be able to get lucky over a short period of time, but the longer they invest, the less likely they are to continuously beat the market. (Even Warren Buffett says that most investors should choose index funds.)

But professional investors should have some real knowledge of beating the market, right? Isn’t that why they do it for a living?

Enter monkeys throwing darts.

The Wall Street Journal’s Dartboard Contest

In his popular personal finance book arguing that investors can’t consistently beat the market (A Random Walk Down Wall Street), economist Burton Malkiel says 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.”

Sounds like a challenge.

So, in 1988, the Wall Street Journal decided to see if Malkiel’s theory would hold up, and created the Dartboard Contest.

How it worked: Wall Street Journal staffers, acting as the monkeys, threw darts at a stock table, while investment experts picked their own stocks. After six months, they compared the results of the two methods. The WSJ even solicited stock picks from some of its readers, and compared them, too.

After 100 contests, the results were in. From Investor Home’s great description of the contest:

On October 7, 1998 the Journal presented the results of the 100th dartboard contest. So who won the most contests and by how much? The pros won 61 of the 100 contests versus the darts. That’s better than the 50% that would be expected in an efficient market. On the other hand, the pros losing 39% of the time to a bunch of darts certainly could be viewed as somewhat of an embarrassment for the pros. Additionally, the performance of the pros versus the Dow Jones Industrial Average was less impressive. The pros barely edged the DJIA by a margin of 51 to 49 contests. In other words, simply investing passively in the Dow, an investor would have beaten the picks of the pros in roughly half the contests (that is, without even considering transactions costs or taxes for taxable investors).

The pro’s picks look more impressive when the actual returns of their stocks are compared with the dartboard and DJIA returns. The pros average gain was 10.8% versus 4.5% for the darts and 6.8% for the DJIA.

So isn’t this a victory for professional stock experts? Malkiel says no. He and a number of other commentators point to a number of factors affecting the results, including:

  • The Announcement Effect: by announcing the stocks to the entire audience of the WSJ, it will artificially inflate the returns (in fact, abnormal gains for the first 2 days after publication scaled back between 15 and 25 days later).
  • Pros picked riskier stocks: Case Western Reserve University professor Bing Liang says that, adjusted for risk, the pros’ would have lost 3.8% on the market over the six-month period.
  • The Dartboard stocks continued to do well: After the contest ended, the dart stocks continued to perform, while the pros’ picks fell from their initial highs after publication.

Winner, Winner, Chicken Dinner

In 2002, the WSJ stopped the contest, but wouldn’t go so far to say who won.

The Wall Street Journal isn’t declaring a winner. Indeed, the decision to wind down the Investment Dartboard competition has nothing to do with the results. “The Dartboard feature has been an entertaining way for readers to learn about picking stocks, and about broader market theories, too,” said Lawrence Ingrassia, Money & Investing editor of the Journal. “But 14 years is a long time for any newspaper feature. Retiring the Dartboard will free more resources to satisfy our readers’ growing appetite for a range of vital financial stories — not just about stocks and bonds, but corporate finance, mergers and acquisitions, banking, accounting and mutual funds, as well as the names and faces behind the news.”

The Journal’s Dartboard Contest isn’t a perfect representation of the stock picking expertise of monkeys vs. professionals, but it has certainly tested a popular theory and given us regular investors something to learn from. The contest has inspired a lot of analysis, testing both professional stock picking as well as the Efficient-market hypothesis.

The long-story short is that, except in a very rare occasion, I’m not knowledgeable enough to beat the market over an extended period of time with my investment choices. And neither are you.

If you’re paying someone to do the job for you, you’re likely not even beating the indexes they’re benchmarking against — and then you have to pay them fees.

The WSJ recently started running a modified version of the Sunday Dartboard Contest, with the latest sharing how its readers are performing against the darts (“Readers Ride the Rally and Beat the Darts“).

More reading:
The Wall Street Journal Dartboard Contest – Investor Home
Monkey business –
Journal’s Dartboard Retires After 14 Years of Stock Picks – Wall Street Journal (Google Cache)

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