This Strategy Beat the World’s Top Hedge Funds—Don’t Try It Malkiel’s monkeys can probably outperform Sohn’s gurus By Spencer Jakab May 9, 2023 8:00 am ET Our Heard on the Street columnists picked a portfolio by throwing darts at a newspaper’s stock pages to see how their stocks compare to professional fund managers. Photo: Josh Loock Please don’t feed or throw objects at the fund managers. David Einhorn and Stanley Druckenmiller, both scheduled speakers at Tuesday’s Sohn Investment Conference, each have earned billions of dollars through investing. Heard on the Street’s columnists are paid peanuts by comparison, but that didn’t stop us from making monkeys out of the conference’s hedge-fund luminaries five years ago. Inspired by Prof. Burton Malkiel’s book “A Random Walk Down Wall Street” in which he quipped 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,” our dart-picked stocks beat the Sohn Conference’s picks by a bruising 22 percentage points. As the mutual-fund boilerplate warns, “past performance is no guarantee of future results.” Heard’s dart-throwers literally just got lucky, so we have repeated our throws (see table below) in honor of the 50th anniversary of Prof. Malkiel’s classic and will tally up the results next May. Our darts landed on 10 long and two short picks. Whether or not we beat the Sohn pros again, a mountain of evidence explains why we could: S&P Dow Jones Indices calculates that more than 93% of stock mutual funds lagged behind a simple index over the decade through 2022. That might be too generous. In a sobering study released more than 15 years ago designed to weed out mere luck, academics Laurent Barras, Olivier Scaillet and Russ Wermers looked at thousands of mutual funds between 1975 and 2006 and determined that only 0.6% of managers had enough demonstrable skill to outweigh their funds’ costs. Advertisement - Scroll to Continue Speakers at the Sohn Investment Conference will include hedge-fund manager Stanley Druckenmiller. PHOTO: VICTOR J. BLUE/BLOOMBERG NEWS Messrs. Einhorn and Druckenmiller, who manage more exclusive and flexible hedge funds, are the crème de la crème, though, vastly outearning mere mutual-fund managers. Tuesday’s picks and pans by the Sohn speakers have three other advantages: For those not paying to attend the virtual conference, they are free so there is no drag from fees; they represent the stars’ very best ideas; and, because of their reputations, the stocks often have an initial move due to publicity. However respected Heard on the Street might be, nobody would buy a stock because one of our darts happened to land on it. Heard on the Street's Dart-Derived Picks NAME SYMBOL BET Root, Inc ROOT Long Maui Land & Pineapple MLP Long PVH Corp PVH Short NGL Energy NGL Long Federated Hermes FHI Long Western Alliance Bancorp WAL Short Seadrill SDRL Long Intercorp Financial IFS Long Semantix STIX Long Coca-Cola Femsa KOF Long entries per page Showing 1 to 10 of 12 entries Heard columnists Should they? Eleven years ago, analysts at Research Affiliates and Towers Watson ran an analysis titled “The Surprising Alpha From Malkiel’s Monkey” that picked multiple virtual portfolios of 30 stocks each year from 1964 through 2012, including some selected at random from the 1,000 largest U.S. companies. They beat a market-capitalization-weighted index by a respectable margin. It was no accident: The study’s portfolios in part did so well because they were regularly reweighted and picked a lot of smaller companies. Both the small-capitalization and equal-weighting effects can lead to extra returns over time. The smallest three Heard dart picks have market values of $82 million, $240 million and $350 million. SHARE YOUR THOUGHTS What are the implications if blind luck can beat the world’s savviest investors? Join the conversation below. But don’t try this at home, kids: Another eye-opening research paper, this one by Hendrik Bessembinder, shows that most stocks tracked over decades don’t produce any return at all in excess of risk-free Treasury bills. About half of all positive returns were generated by 83 companies between 1926 and 2019, or less than one-third of 1% of all stocks tracked. To match the monkey portfolios, one would have to pick many stocks randomly each year and then keep repeating the process, still possibly failing to buy and hold rare big winners. The only way to guarantee finding those needles in a haystack is paying for the whole haystack—an index fund. You would beat most fund managers but only match the market. The man who inspired all the monkey jokes, Dr. Malkiel, endorsed that simple strategy in an email last week when informed of the return of Heard’s contest, saying: “Of course, as you know, I do not favor investing by throwing darts. I want investors to hold everything.” David Einhorn’s reputation can move stocks. PHOTO: ALEX FLYNN/BLOOMBERG NEWS Write to Spencer Jakab at Spencer.Jakab@wsj.com
Anything works in a Bull market. There was one study that monkeys threw darts at a newspaper and did well.
"There was a study that monkeys threw darts ..... " Ya mean the study that was ahh referenced in the above OP article? More random walk nonsense - much like PA repeating over and over, so do Journalists and Academics counterfactually claiming it can't.
These are the top 50 picks by fund managers based on their 13F-HR filings. AMZN GOOGL MSFT JPM JNJ GOOG TSLA PG PEP CSCO BRKB V UNH MRK IVV HD VTV PFE SCHD KO IBM BAC AAPL VOO MCD VZ COST DIS CVX VYM ABBV IJR UPS XOM AVGO VTI SPY NEE QCOM NVDA MDT T VEA ABT PM DUK INTC HON CMCSA WMT Holding proportion by stock ranking of top fund managers. Manager/Stock Rank,1_100,101_200,201_300,301_400,401_500,501_600,601_700,701_800,801_900,901_1000 Morgan Stanley,0.2236,0.0805,0.0666,0.0521,0.0363,0.0339,0.0249,0.027,0.0212,0.0217 Millennium_Mgmt,0.0302,0.0293,0.0351,0.0295,0.0289,0.0212,0.0195,0.0211,0.0216,0.0204 FMR,0.2181,0.0706,0.0677,0.0456,0.0367,0.03,0.0325,0.0186,0.0165,0.0324 Jane Street,0.0785,0.0475,0.0432,0.0395,0.0204,0.02,0.0372,0.0289,0.038,0.0341 JPM,0.2415,0.1005,0.0751,0.0532,0.0335,0.0261,0.0573,0.0249,0.0395,0.0134 State Street,0.323,0.1063,0.0637,0.0526,0.0505,0.0314,0.0263,0.0262,0.0194,0.0169 Blackrock,0.2566,0.0831,0.056,0.0487,0.0442,0.0299,0.0277,0.0258,0.0224,0.02 Bridgewater,0.3031,0.1403,0.0485,0.0285,0.0428,0.0158,0.0302,0.0192,0.0259,0.0158 Citadel,0.059,0.0437,0.0388,0.0344,0.0325,0.0328,0.0325,0.0288,0.0241,0.0228 Price T Row,0.3098,0.1294,0.0493,0.0809,0.044,0.0235,0.0487,0.0266,0.0163,0.0271 Renaissance,0.0381,0.0275,0.0207,0.0341,0.0244,0.0359,0.0196,0.0264,0.0193,0.0166 Goldman,0.1668,0.0834,0.0455,0.0392,0.0284,0.032,0.0279,0.0237,0.0246,0.03 Bershire Hathaway,0.631,0.1359,0.0226,0.0564,0.0767,0.0034,0.0034,0.0016,0.0075,0 It seems that each has their own bag of tricks. PS: Non-US based equity are not reported. Table is in CSV format.
I remember reading A Random Walk Down Wall Street in 1988 for my Finance 133 class (Investments) and I think the point of the monkey dart story was to emphasize that stock analysts were comprised by their firm's relationship with the company in question which is really why there are no sell ratings. My memory of taking classes about investment analysis in the 1980s was that most mutual funds back then were really long-term oriented in their stock ownership. It seems like after the Netscape IPO most if not all funds became trading vehicles with huge turnover. I mean you have Cathie Woods fund which is basically a hedge fund with her daily buys & sells. This makes the Graham & Dodd tomb less useful.
%% I REMEMBER reading that book cover also; i got more off the cover+ contents of Jack schwager Hedge Fund Market....... Professor Jim rogers, also got more out of his book than the random walker; but walking is a good idea. so never underestimate a good word on a goofy cover/LOL
They get quite upset when you point out they are simply lucky. Anyone could buy the S&P reinvest dividends and cherry pick any winning period. Easy when you start in the 80s JP Morgan continue to lose my money, >10% p.a.
%% Good points; but sounds like S Drunkenmiller is much more than lucky. He maybe more of an apple picker + pumpkin picker/ giant pumpkin picker /LOL. Dont know if he is a cherry picker?? Especially since he disclosed one of his favorite quotes ''it takes courage to be a pig" Also he disclosed he blew up an account doing that[Only once did he BLOW UP an accountLOL; so looks like skill was also involved in not blowing up an account 2 or 3 times]