Defending Experts over Monkeys

I am here to defend the experts over dart-throwing monkeys when it comes to stock selection and investing.

In this substack published by Onveston, the article advises experts to learn to take a step back and learn how probabilities can work in their favor. Princeton University professor Burton Malkiel claimed this in his bestselling book, A Random Walk Down Wall Street written in 1973 claims 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.”

That, according to me, is nothing more than a thought experiment and that’s where it should end.

The explanation for why experts underperforms goes something like:

1. Small cap stocks outperform Large caps and a randomly ‘weighted’ portfolio selection will have higher % of small caps as compared to the one selected by ‘expert’

2. The duration game

My rebuttal:

1. Investors come to market with perceived risk based on underlying entities (small stocks run higher risk), which are run and impacted by the doings of fellow humans (governance etc.). Randomness (or in this case dart throwing) takes away the whole human aspect of it. It assumes all companies are fungible. This is a huge factor why handpicked stocks by experts underperform market

2. Small stock outperform Large stocks - yes. They do not necessarily outperform risk adjusted returns

3. The higher the number of stocks to choose from, the higher is the probability of win for a dart-throwing monkeys. But, the experts selection pool is shrunk by investors areas of interest. The interesting question will be within a pool of selected stocks based on investor’s interests, does monkeys portfolio outperform?

The important questions here is how covered investors feel in terms of trusting others with hard earned money rather than absolute returns.

Image generated by Dall-E 2