How Buffett’s $1 Million Bet Astounded Wall Street
While researchers conducted an experiment with blindfolded monkeys, Buffett made a bet with the Top Wall Street Fund Managers. How these stories are linked, and more importantly, what it all means for people like you and me.
Welcome To The Real Wall Street
Before get into Buffett’s million-dollar bet, you first
To my point, read this quote from Research Affiliates.
The implication of these findings is that many of the plausible investment beliefs held by investment professionals are nothing more than good stories.
Don’t worry, this article isn’t all doom and gloom. You need to know the truth of some things, because only after we know what the problem we’re facing is can we fix it.
After that, we’ll talk a little bit about the inner workings of Wall Street and the Big Banks.
Oh, I almost forgot! How about before the boring stuff we go straight to the blindfolded monkey experiment, then Warren Buffett’s 1 million dollar bet with the Wall Street Elites. Sound good?
After all of that is out of the way, we can go over some things I’ve used to find success in my own investments.
Simple ideas and processes, nothing too complicated or extraordinary. Like the old saying goes: “Keep it simple stupid!”
I live by that motto.
Now, let’s get to the bottom of this Monkey Business!
The Monkey Experiment
I read this Forbes Article about an experiment a while back. It claimed that blindfolded monkeys could beat the performance of top Hedge Funds on Wall Street by simply throwing darts at the Wall Street Times. It was an interesting article, although very depressing at the same time.
Its thesis was that you could put together a portfolio of stocks that would beat the returns of even the biggest funds and brightest minds on Wall Street, by simply letting a blind monkey throw darts at a board covered with random stock names.
Fascinating stuff right?
What’s more, is that I first heard of this “experiment” in a book called A Random Walk Down Wall Street. The author Burton Malkiel, a Princeton University professor, made a statement in one of the chapters that intrigued me.
“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.”
He wrote that before the experiment you read about in the beginning.
Along comes a group of researchers, who must have read the book as well, and they decide to put Malkiel’s theory to the test and see what would happen.
This is a quote from Research Affiliates, talking about their findings.
“Malkiel was wrong,” stated Rob Arnott, CEO of Research Affiliates, while speaking at the IMN Global Indexing and ETFs conference earlier this month. “The monkeys have done a much better job than both the experts and the stock market.”
Honestly, that blew my mind. Especially considering that when Malkiel wrote those few lines in his book, I’m fairly certain that he never thought someone would actually go get monkeys and turn what he intended as a semi-serious joke into a very serious reality.
Think of the implications this has on one of the largest industries in the world economy.
So you’re telling me that 100s of millions of people around the world have been paying for these so-called professionals to invest, manage, and protect our assets and money, yet all the while a bunch of blind monkeys had been earning better returns?
It’s hard to truly believe but easy to understand. If you tell someone about this they’ll likely say:
“I guess it makes sense.”
“Those actively managed funds tend to overtrade to charge commissions, and you’re better off buying and holding just about any decent stock, than over trading.”
Yet, tell them to open up their TD Ameritrade account and let their 4-year-old pick stock names out of a hat as the method for rebalancing their portfolio, then hold those stocks without trading once.
Yeah right, good luck with that.
How Well Did These Monkeys Actually Do?
Year after year, from 1964 to 2010, those researchers put together 100 portfolios of 30 stocks. These 30 stocks, were selected out of 1,000 random different companies.
They then simulated 100 monkeys throwing darts at the stock page in the Times, and whatever companies the darts landed on went into the portfolio.
Amazingly, 98 times out of 100, the monkeys won, beating the average returns of the managed funds.
I don’t know about you, but that’s why I don’t use these so-called professionals when it comes to my investment decisions.
It took me a long time to learn the ropes, but once I had it paid ten-fold.
The money I may or may not have lost, (had I chosen to hire a “professional” to guide me), pales in comparison to the amount I have made now that I know what the hell I’m doing.
If I choose to go with the “professional,” how would I have ever know if my investments were truly doing good, bad, or great?
When you rely on other people to do 100% of the work for you, and you don’t do any research on, or educate yourself about the investment decisions being made, you’ll always be dependant on them.
You have to learn to be self-reliant when it comes to your finances. You’ll begin to develop confidence in your ability to manage and grow your own investments, make decisions that will protect your family’s assets.
I mean, these guys can’t even beat the monkey’s throwing darts.
The point is, educate yourselves. Don’t depend on other people to do it for you, as they will NEVER care about your own wallet as much as you yourself.
Buffett’s Million-Dollar Bet With Wall Street
Warren Buffett made a bet about a decade ago, that not a single hedge fund manager on Wall Street, (or the fund they managed), could beat the average return of the S&P 500 over any given period.
So the gains for both the S&P and the hedge funds were tracked over the past decade, and it seems Buffett was right.
I mean, honestly, I doubt that you’re shocked considering that they couldn’t even beat the blindfolded monkeys…
Buffett once said: “Diversification is protection against ignorance.”
What he meant was that if you really knew what you were doing in the stock market, then buying index funds, or diversifying your portfolio made no sense at all.
It limited your gains.
But, if you didn’t know what you were doing, that’s a different story. Just stick to the Index Funds and quit trying to beat something that even Harvard Educated Financial experts can’t.
It’s hard to say what and who’s right or wrong here. I mean, this is truly a pickle. It also seems very random, not necessarily favorable to the hard-working-educated types.
If that were true then the monkeys wouldn’t win every time!
It’s my opinion that it all comes down to the individual, and the amount of work they’re willing to commit. Plain and simple. Some will do good being active traders, always picking winners, and some won’t. Those who aren’t good should stick to index funds and the company 401 (K) plan.
There’s nothing wrong with that either.
Not everyone is good at everything, that’s just the way it is. The way it’s always been.
My Personal Opinion On The Matter
I guess it comes down to a few things. I just mentioned that it’s really dependent on the type of person, but then there are other factors at play.
Personally, I like to trade low float penny stocks and make quick scalping plays off them a few times per week to get quick profits. It’s not for everyone and you really have to enjoy watching the markets all day.
In general, I do think that if you have a small account you shouldn’t be trading stocks over $85.
I began thinking this way one day when it occurred to me.
“If you’re just starting out and you don’t have lots of cash to begin with, it doesn’t make sense to buy one or two shares of large cap stock that will only return you perhaps 10–15% a year.
Sure, this is not always the case, and you always have to look at each company individually.
Most of the time it is safer to buy these large, established companies than it is to invest in something new. Though I feel that a lot of the time people are buying them because of the tales of wealth they brought certain people.
They also get the most attention from the main-stream financial networks.
Think of this for a second.
All too often the stories about how if you had bought this or that company back in the 90s you’d be a billionaire
well…
It’s not the 90s anymore!
So if I only have say $500, maybe less, to begin trading with then I’d much rather get 60–70 shares of a $7 dollar company, than one or two shares that cost hundreds.
And don’t even get me going on fractional shares.
The Takeaway
If you remember anything from this article let it be these last few points, as they’re the most important and apply to everyone equally.
For Managed Investments
No single person or entity has all the answers. I know that goes without saying, but it’s especially true in finance. If you don’t feel comfortable managing your own investments, or you simply don’t have the time, then you will have to hire someone to do it for you, and you’ll have to trust them without interfering all the time.
That doesn’t mean you have to always take what they’re telling you at face value. Input your own due diligence and research. Make sure they know what they’re doing.
For Self-Managed Investments
There’s no one-size-fits-all strategy out there. Large-cap, small-cap, none of that matters if it’s not right for you as an individual investor. Find a style you like and are comfortable with, then tweak it to achieve the end result you want.
In order to do this, you have to know what your goals are. From there figure out the timeframe. You have to be thorough and realistic with this part because a lot will be determined by it. Knowing how long you’ve got will help you decide what your optimal risk-to-reward ratio should be. That and being honest with yourself. How much are you really willing to risk in order to gain?
Risk, reward, time, and effort are the ingredients for a successful investment plan.
