Since the Currensee marketing department is approximately 75% Crazy Cat Lady, you know we were excited by the Guardian headline, “Ginger moggy beats the professionals and a team of students in the Observer's share portfolio challenge” (Note to confused Americans: moggy means cat in British)
Here’s what happened: two investment professionals took on a roomful of schoolkids and an orange cat in a stock-picking contest set up by the Observer. Each team invested 5,000 (fake) GBP for a year, and was allowed to reallocate quarterly. The final ROI : Cat, 10.8%; professionals, 3.5%, and students, -3.2%.
Aha, you cry! It’s the triumph of the Random Walk! After all, what’s more random than the behavior of a cat? Economist Burton Malkiel's book A Random Walk Down Wall Street is a popular one, and it pretty much says that share price moves, if not actually random, are sufficiently complex as to be practically random.
Hold on, put down the catnip, even if the market behaves randomly, does that mean that random picking is the best market strategy?
If you had bought and held the entire FTSE all-shares index (the universe from which the teams picked their stocks) for 2012, you’d have earned 8.2%. That reduces the cat’s edge to just 2.6%, still nothing to sneeze at, and makes the professionals and kids look pretty bad. Maybe “buy the market” is the way to go.
Let’s look at the rules of the Observer’s game. Players were restricted to stocks in one index – not ideal diversification - and could buy or sell just once per quarter. It doesn’t say for sure, but I don’t think they could do any short selling or avail themselves of future or options on the stock in that one index. Would you pay a money manager to apply those rules to your hard-earned nest egg?
Clearly the game has been simplified for the school children and perhaps the cat, too. It’s a fun illustration of randomness, but it was like a poker tournament stopped after the first four cards were dealt. Trading and money management are long-term full-time jobs, and real professionals need access to all the tools and markets they can get to create diversified portfolios for their clients.
Or, you could always just throw your favorite toy mouse at a grid of numbers and hope for the best.