How Some Investors Profit from Randomness
Which stocks will perform best over any given period of time? That’s just unknowable. Many financial journalists and stock gurus love to talk about “cause and effect” in markets. Yet markets pretty much show randomness. So why fight it? Why not embrace it? Some do.
Picking stocks at random. Yes, it sounds crazy. But it can and does deliver superior returns. How is that possible?
Random selection has practical advantages – like no other strategy does. It eliminates research time and expenses. It ends emotional over-involvement. And it reduces
professional management costs. It can be a low-cost, low-stress way to build a portfolio.
You are right to ask – wouldn’t a “random” portfolio itself be risky? And inferior to one built around your particular objectives?
The Results Tell All: For Most,
Stock Picking Is a Fool’s Game.
Numerous academic studies confirm this shocking fact….that most professional money managers lag behind the markets. The longer the “pros” manage your funds, they less likely they are to actually beat the market. Individual investors pay fund managers big bucks. Yet most underperform over a period of years to decades. It isn’t just the lack of added value paid for over a long time. It’s mostly because of fees that actually deplete your capital. It’s like compound interest working in reverse. A wicked, slow-motion reverse shimmy.
Get this: Most money managers do no better than picking stocks at random. And that’s even before fees. So professional stock pickers are “as good as a monkey with a dart board.” Except that monkeys don’t charge for random stock picks!
Seriously – Hedge Fund
Titan Bets on Randomness
Let’s talk about a concrete example to back this up. One of the world’s top hedge fund managers is David Harding. He heads the $25.5 billion firm Winton Capital.Harding let the cat out of the bag recently. He not only made the case for investing at random. He also spelled out a strategy that anyone can adopt.
“You choose stocks at random and weight them equally,” Harding said in a recent interview. “We tested the idea and immediately did better than the S&P 500.”
He continued, “If you have the same expected returns from assets you should put the same weights on them to optimize the portfolio. So if you choose stocks at random and combine them, you will always beat S&P 500, or in 99.99 percent of cases.”
By picking several S&P 500 stocks at random and weighting them equally, you’ll achieve diversification, avoid penny stocks and avoid fees charged by ETF issuers and fund managers. For real, yes, – you’ll probably do better than most pros over time.
This highly unconventional strategy may not be one to adopt for your entire investment portfolio. But it’s something you can look into to whenever other approaches leave you taxed and frustrated.