Are Blind Monkeys Better Stock Pickers than Professionals?
We’ve mentioned on our site and in some blogs that studies have shown that, on average, you’d do as well buying and selling stocks randomly than professionals do, with all their research and all their training. Therefore, many advocate putting your money in a low-fee Exchange Traded Fund (ETF) or Mutual Fund that closely tracks the S&P/TSX.
Now we have a huge new study by the University of Chicago, Carnegie Mellon University, MIT and portfolio analytics firm Inalytics Ltd that validates part of this maxim (and invalidates another part). Researchers looked at 4 million trades among 783 portfolios from 2000 to 2016 and they found that professional stockpickers did outperform random stock picks. But, when it came to selling, the professionals did 100 basis points, or a full percentage point, worse in yearly returns when compared to simply selling holdings at random.
The study concluded that the likely reason for the discrepancy was “asymmetric allocation of cognitive resources”, or in plain English that the professionals spent more time analyzing what and when to buy than what and when to sell.
So, definitely get some advice when picking stocks to buy. But when selling, you might want to find a blind monkey to help.