It’s amazing how often Monkeys and Money come up in conversation.
First, there is the proof that money is in our DNA like sex. Monkeys proved it in a Yale University exercise back in 2009.
Second, monkeys are continually used to prove that they can invest better than fund managers. A bit like monkeys make better astronauts, even though they have yet to invent a rocket, monkeys can make more money than anyone investing funds on your behalf.
The monkey investor became legend after Princeton University economist Burton Malkiel said, in his 1973 book A Random Walk Down Wall Street: “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.”
OK, now there’s a challenge and one that the Wall Street Journal felt more than capable of standing up to.
As a result, the WSJ started a monkey versus manager contest in 1988 and continued until 2002. They tried to show that more often than not the manager would win but stopped the contest in 2002 as the monkeys – their editors – were probably starting outperform the fund manager.
Nevertheless it has not stopped the Daily Mail reporting that Lusha the chimpanzee outperforms 94% of Russia bankers with her investment portfolio in 2010 or Marketwatch showing the monkeys can be better stockpickers than a bunch of Harvard MBAs in 2011.
I've even blogged about it here a few times:
Stockpicking Monkey Adam Monk, as discussed back in 2008
So I was amused by this press release from Cass Business School that landed in my inbox this week: Monkeys beat market cap indices.
Sure, and I’m a monkey’s uncle. What’s all this about?
Researchers at Cass Business School have found that equity indices constructed randomly by ‘monkeys’ would have produced higher risk-adjusted returns than an equivalent market capitalisation-weighted index over the last 40 years.
A study based on monthly US share data from 1968 to 2011 found nearly all 10 million indices weighted by chance delivered vastly superior returns to the market cap approach – a discovery likely to come as a blow to investors that have billions of dollars worldwide invested on a market cap-weighted basis.
The finding comes from two papers published by Cass Business School’s Cass Consulting, which investigated alternative methods of constructing equity indices.
Co-author of the research, Professor Clare, explained: “We programmed a computer to randomly pick and weight each of the 1,000 stocks in the sample; we effectively simulated the stock-picking abilities of a monkey. The process was repeated 10 million times over each of the 43 years of the study.
“The results of this experiment showed that many of the monkey fund managers would have generated a superior performance than was produced by some of the alternative indexing techniques. However, perhaps most shockingly we found that nearly every one of the 10 million monkey fund managers beat the performance of the market cap-weighted index.”
Maybe I should be a monkey’s uncle.