Research by Cass Business School has shown that monkeys picking company shares at random from a list of available stocks will beat the stock market consistently.
By emulating a monkey, you too can beat the stock market index of your choice and enjoy better returns too.
In this article, I will explain why this is the case and what you have to do yourself to pick stocks “like a monkey.”
What The Research Shows
The research by Cass Business School and sponsored by Aon Hewitt was based on monthly US share data taken from 1968 to 2011 and examined 10 million different portfolios weighted randomly.
In other words, each of the 10 million different share portfolios consisted of a number of company shares picked purely at random from a list of available shares for the US stock market.
Each of these share portfolios were referred to by the researchers as “monkey funds” because a monkey could have picked them at random.
Hence, no intelligence whatsoever was applied to the stock picking process.
The performance of each of these “monkey funds” was then compared to the stock market from which their stocks were selected.
The surprising result was that the “monkey funds” performed better than the stock market index.
Why Do Monkey Funds Beat The Market?
A stock market index is usually a weighted index with the weighting based on the market capitalization of the shares it contains.
This means that the performance of the bigger companies in the index have more impact on the performance of the overall index than the smaller companies do.
So if the share price of the largest company in the index grew by 10% and all the others remained the same, the index would rise by a different amount than it would if only the smallest company’s share price grew by 10% with all the others staying the same.
That’s because the performance of the index is weighted towards the larger companies.
In the case of the “monkey funds” it does not matter which one of the company’s share prices rises by 10%, the effect on the monkey fund portfolio will always be the same.
This means that your portfolio of share picks just needs to have more winners than losers for you to make money – it does not matter which shares rise and which shares fall, as long as you have more risers or bigger rises than you do fallers.
The other reason is a bit more complicated to understand. If you think about it, the largest companies in a stock market are the largest because they have grown the most and have been growing a lot recently. Unfortunately, these are probably not the shares that are going to be rising the most in the next few weeks because of profit taking and because the better opportunities are likely to be those at an earlier stage of their growth spurt, cycle, most undervalued, etc.
How To Invest In Shares
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