“… it means 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”. Burton G. Malkiel, A Random Walk Down Wall Street.
Professor Burton Malkiel, the Princenton professor once asked his students create charts of fictional stocks by flipping a coin. The starting stock price was at 50$. The stocks either gained or lost 50cents depending on the coin flip. After a while Malkiel showed these charts to a technician analyst and the guy said “What is this company? We've got to buy immediately. This pattern's a classic. There's no question the stock will be up 15 points next week.” The lesson for all that most of us love to see patterns and predict the future, but many times flipping the coin is easier and better.
Malkiel’s random walk hypothesis does not mean that companies and stocks are rising and falling randomly. But mean that in the short term we are wrong. We are not able to see the short term fluctuations in prices. Most of the short forecasters are only charlatans. In Malkiel’s test the Blindfoldedmonkey do better job than financial analysts.
Later in 1990s one contest held between pros and the monkey. The pros won 61 of the 100. But they lost 39% of the time. The performance of the pros versus the Dow Jones Industrial Average wasn’t impressive, only 15% could beat DJIA. Simply investing passively in the Dow, an investor would have beaten the picks of the pros. But found that the pro’s portfolios were much more risky and paid out less in dividends than the stocks picked by dart.
This story reminds us being always humble and don’t overestimate the forecast because no one sees what holds the future.
The BFM Assets Team.
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