Friday, June 23, 2006

Dartboards are competitive with money managers

An interesting discussion about why picking stocks at random is likely to perform just as well as the best professional money managers, and why the Wall Street Journal's competitions are (inadvertently? yeah, sure) biased in favour of the professionals.

The Journal set out to create an entertaining contest to test Malkiel's theory and give its readers some new investment ideas in the process. Wall Street Journal staff members typically play the role of the monkeys (the Journal listed liability insurance as one reason for not going all the way and actually using live monkeys).
Liang concluded that the pros neither outperformed the market nor the darts. According to Liang, the pros supposed superior performance could be explained by the small sample size, the announcement effect, and the missing dividend yields. One of the strongest criticisms of the contest is the fact that the Journal measures performance by price appreciation only, despite the fact that total return is measured by both price appreciation and dividends.

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