This Strategy Beat the World’s Top Hedge Funds—Don’t Try It
Malkiel’s monkeys can probably outperform Sohn’s gurus
By Spencer Jakab
May 9, 2023 8:00 am ET
Our Heard on the Street columnists picked a portfolio by throwing darts at a newspaper’s stock pages to see how their stocks compare to professional fund managers. Photo: Josh Loock
Please don’t feed or throw objects at the fund managers.
David Einhorn and Stanley Druckenmiller, both scheduled speakers at Tuesday’s Sohn Investment Conference, each have earned billions of dollars through investing. Heard on the Street’s columnists are paid peanuts by comparison, but that didn’t stop us from making monkeys out of the conference’s hedge-fund luminaries five years ago. Inspired by Prof. Burton Malkiel’s book “A Random Walk Down Wall Street” in which he quipped that “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 the experts,” our dart-picked stocks beat the Sohn Conference’s picks by a bruising 22 percentage points.
As the mutual-fund boilerplate warns, “past performance is no guarantee of future results.” Heard’s dart-throwers literally just got lucky, so we have repeated our throws (see table below) in honor of the 50th anniversary of Prof. Malkiel’s classic and will tally up the results next May. Our darts landed on 10 long and two short picks. Whether or not we beat the Sohn pros again, a mountain of evidence explains why we could: S&P Dow Jones Indices calculates that more than 93% of stock mutual funds lagged behind a simple index over the decade through 2022.
That might be too generous. In a sobering study released more than 15 years ago designed to weed out mere luck, academics Laurent Barras, Olivier Scaillet and Russ Wermers looked at thousands of mutual funds between 1975 and 2006 and determined that only 0.6% of managers had enough demonstrable skill to outweigh their funds’ costs.
Advertisement - Scroll to Continue
Speakers at the Sohn Investment Conference will include hedge-fund manager Stanley Druckenmiller. PHOTO: VICTOR J. BLUE/BLOOMBERG NEWS
Messrs. Einhorn and Druckenmiller, who manage more exclusive and flexible hedge funds, are the crème de la crème, though, vastly outearning mere mutual-fund managers. Tuesday’s picks and pans by the Sohn speakers have three other advantages: For those not paying to attend the virtual conference, they are free so there is no drag from fees; they represent the stars’ very best ideas; and, because of their reputations, the stocks often have an initial move due to publicity. However respected Heard on the Street might be, nobody would buy a stock because one of our darts happened to land on it.
Heard on the Street's Dart-Derived Picks
NAME SYMBOL BET
Root, Inc ROOT Long
Maui Land & Pineapple MLP Long
PVH Corp PVH Short
NGL Energy NGL Long
Federated Hermes FHI Long
Western Alliance Bancorp WAL Short
Seadrill SDRL Long
Intercorp Financial IFS Long
Semantix STIX Long
Coca-Cola Femsa KOF Long entries per page
Showing 1 to 10 of 12 entries
Heard columnists
Should they? Eleven years ago, analysts at Research Affiliates and Towers Watson ran an analysis titled “The Surprising Alpha From Malkiel’s Monkey” that picked multiple virtual portfolios of 30 stocks each year from 1964 through 2012, including some selected at random from the 1,000 largest U.S. companies. They beat a market-capitalization-weighted index by a respectable margin.
It was no accident: The study’s portfolios in part did so well because they were regularly reweighted and picked a lot of smaller companies. Both the small-capitalization and equal-weighting effects can lead to extra returns over time. The smallest three Heard dart picks have market values of $82 million, $240 million and $350 million.
SHARE YOUR THOUGHTS
What are the implications if blind luck can beat the world’s savviest investors? Join the conversation below.
But don’t try this at home, kids: Another eye-opening research paper, this one by Hendrik Bessembinder, shows that most stocks tracked over decades don’t produce any return at all in excess of risk-free Treasury bills. About half of all positive returns were generated by 83 companies between 1926 and 2019, or less than one-third of 1% of all stocks tracked. To match the monkey portfolios, one would have to pick many stocks randomly each year and then keep repeating the process, still possibly failing to buy and hold rare big winners.
The only way to guarantee finding those needles in a haystack is paying for the whole haystack—an index fund. You would beat most fund managers but only match the market. The man who inspired all the monkey jokes, Dr. Malkiel, endorsed that simple strategy in an email last week when informed of the return of Heard’s contest, saying:
“Of course, as you know, I do not favor investing by throwing darts. I want investors to hold everything.”
David Einhorn’s reputation can move stocks. PHOTO: ALEX FLYNN/BLOOMBERG NEWS
Write to Spencer Jakab at Spencer.Jakab@wsj.com
Malkiel’s monkeys can probably outperform Sohn’s gurus
By Spencer Jakab
May 9, 2023 8:00 am ET
Our Heard on the Street columnists picked a portfolio by throwing darts at a newspaper’s stock pages to see how their stocks compare to professional fund managers. Photo: Josh Loock
Please don’t feed or throw objects at the fund managers.
David Einhorn and Stanley Druckenmiller, both scheduled speakers at Tuesday’s Sohn Investment Conference, each have earned billions of dollars through investing. Heard on the Street’s columnists are paid peanuts by comparison, but that didn’t stop us from making monkeys out of the conference’s hedge-fund luminaries five years ago. Inspired by Prof. Burton Malkiel’s book “A Random Walk Down Wall Street” in which he quipped that “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 the experts,” our dart-picked stocks beat the Sohn Conference’s picks by a bruising 22 percentage points.
As the mutual-fund boilerplate warns, “past performance is no guarantee of future results.” Heard’s dart-throwers literally just got lucky, so we have repeated our throws (see table below) in honor of the 50th anniversary of Prof. Malkiel’s classic and will tally up the results next May. Our darts landed on 10 long and two short picks. Whether or not we beat the Sohn pros again, a mountain of evidence explains why we could: S&P Dow Jones Indices calculates that more than 93% of stock mutual funds lagged behind a simple index over the decade through 2022.
That might be too generous. In a sobering study released more than 15 years ago designed to weed out mere luck, academics Laurent Barras, Olivier Scaillet and Russ Wermers looked at thousands of mutual funds between 1975 and 2006 and determined that only 0.6% of managers had enough demonstrable skill to outweigh their funds’ costs.
Advertisement - Scroll to Continue
Speakers at the Sohn Investment Conference will include hedge-fund manager Stanley Druckenmiller. PHOTO: VICTOR J. BLUE/BLOOMBERG NEWS
Messrs. Einhorn and Druckenmiller, who manage more exclusive and flexible hedge funds, are the crème de la crème, though, vastly outearning mere mutual-fund managers. Tuesday’s picks and pans by the Sohn speakers have three other advantages: For those not paying to attend the virtual conference, they are free so there is no drag from fees; they represent the stars’ very best ideas; and, because of their reputations, the stocks often have an initial move due to publicity. However respected Heard on the Street might be, nobody would buy a stock because one of our darts happened to land on it.
Heard on the Street's Dart-Derived Picks
NAME SYMBOL BET
Root, Inc ROOT Long
Maui Land & Pineapple MLP Long
PVH Corp PVH Short
NGL Energy NGL Long
Federated Hermes FHI Long
Western Alliance Bancorp WAL Short
Seadrill SDRL Long
Intercorp Financial IFS Long
Semantix STIX Long
Coca-Cola Femsa KOF Long entries per page
Showing 1 to 10 of 12 entries
Heard columnists
Should they? Eleven years ago, analysts at Research Affiliates and Towers Watson ran an analysis titled “The Surprising Alpha From Malkiel’s Monkey” that picked multiple virtual portfolios of 30 stocks each year from 1964 through 2012, including some selected at random from the 1,000 largest U.S. companies. They beat a market-capitalization-weighted index by a respectable margin.
It was no accident: The study’s portfolios in part did so well because they were regularly reweighted and picked a lot of smaller companies. Both the small-capitalization and equal-weighting effects can lead to extra returns over time. The smallest three Heard dart picks have market values of $82 million, $240 million and $350 million.
SHARE YOUR THOUGHTS
What are the implications if blind luck can beat the world’s savviest investors? Join the conversation below.
But don’t try this at home, kids: Another eye-opening research paper, this one by Hendrik Bessembinder, shows that most stocks tracked over decades don’t produce any return at all in excess of risk-free Treasury bills. About half of all positive returns were generated by 83 companies between 1926 and 2019, or less than one-third of 1% of all stocks tracked. To match the monkey portfolios, one would have to pick many stocks randomly each year and then keep repeating the process, still possibly failing to buy and hold rare big winners.
The only way to guarantee finding those needles in a haystack is paying for the whole haystack—an index fund. You would beat most fund managers but only match the market. The man who inspired all the monkey jokes, Dr. Malkiel, endorsed that simple strategy in an email last week when informed of the return of Heard’s contest, saying:
“Of course, as you know, I do not favor investing by throwing darts. I want investors to hold everything.”
David Einhorn’s reputation can move stocks. PHOTO: ALEX FLYNN/BLOOMBERG NEWS
Write to Spencer Jakab at Spencer.Jakab@wsj.com
