The Wall StreetJournal just revealed the results of a year-long stock-picking contest which pitted a group of dart-throwing monkeys, I mean newspaper reporters, against a group of high-profile hedge fund managers.
The idea for the contest has its roots in Burton Malkiel’s famous quote in “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 the experts.”
The contest was held in conjunction with the Sohn Investment Conference which raises money for pediatric-cancer research. The Conference offers a rapid-fire format, with a parade of hedge-fund managers and other prominent investors given 15-minute slots to present their “best idea.”
Since the Wall Street Journal doesn’t publish comprehensive stock tables anymore, the reporters used the stock tables from sister-publication Barron’s. The tables were tacked to the wall and on April 23 of last year, and the reporters threw 10 darts, with the first eight designated as longs and the last two designated as shorts.
The results a year later are a resounding win for the
monkeys newspaper reporters over the professional money managers. The columnists’ eight long and two short picks beat the pros’ selections by a whopping 27 percentage points in the year through April 22. Only 3 of 12 of the Sohn picks even outperformed the S&P 500. And the darts contest didn’t even consider the hefty management and performance fees such funds command, which would have made the victory even bigger for the newspaper reporters.
The results are not unique.
Mr. Buffett bet $1 million in 2007 that an index fund would outperform a basket of hedge funds over a decade. Buffett’s index fund prevailed in nine years out of 10, racking up a return of 126% compared to just 36% for the funds after fees. From the start of the bet through the end of 2016, Mr. Buffett’s S&P 500 index fund returned 7.1% compounded annually. The competing basket of funds of hedge funds selected by asset manager Protégé Partners returned an average of 2.2%.
So how can professional money managers justify their services, and more importantly, their fees?
Research shows that you can’t beat the market, and when you factor in fees, managed funds come out on the losing end of the deal.
So the lesson is simple – just put your money in an index fund and let it accumulate year after year.
Your account balance will thank me.
*image from Wall Street Journal