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Any Monkey Can Beat the Market! Really?

Any monkey can beat the market! That’s exactly how a headline of an article I recently came across reads.

This article was published in the Wall Street Journal in late 2012 (a tribesman recently shared it with me) and stated that if you give a monkey enough darts to throw at stock pages, they’ll beat the market. This was based on a research that simulated results of 100 monkeys throwing darts at the stock pages in a newspaper. The average monkey outperformed the US stock market index by an average of 1.7% per year since 1964.

Now, that would have bought them a lot of bananas!

In fact, as early as 1973, Burton Malkiel, a professor at Princeton University had claimed in his book, A Random Walk Down Wall Street, 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 experts.”

Now, given that the monkeys have not just earned as much as the US stock market index, but have handsomely outperformed it, there’s something worth pondering about for those who are trying to work hard to pick their own stocks.

Why care to analyze businesses and estimate intrinsic values when you can hire a monkey (or I will send one to you for a fee 🙂 ) to pick your stocks?

You must care, dear tribesman!

Monkeys and Stock-Picking
While I don’t have data going back 20-30 years, I definitely wanted to test this “Monkey Hypothesis” in the Indian stock market.

Thus I did this small exercise of creating three Monkey Portfolios, one each from the BSE-Sensex, BSE-200, and BSE-500 indices.

I did not throw dart at these indices (have never been good at that, you see!). Instead…

  1. I listed down all stocks from each of these indices in alphabetical order.
  2. I generated a random number on the website – So this was my dummy monkey.
  3. Example – If the number generated was 33, I picked the 33rd stock from top and added it to my “Monkey Portfolio”.
  4. Using this method, I picked 10 stocks from each of these indices to create three different portfolios

Here are the three Monkey Portfolios I created this way…

(My monkey seems to have a special affinity towards Bajaj Auto, as the stock got chosen in two portfolios) 🙂

Anyways, here is the performance of the three portfolios against their respective indices over the past two years (since March 2012)…

Here is the performance of the three portfolios against their respective indices over the past three years (since March 2011)…

As you can see from the charts above, my monkey has really disappointed me. Its stock picking skill – or let me say, dart-throwing skill – has caused 5 out of my 6 Monkey Portfolios to underperform the broader indices. 🙁

The only Monkey Portfolio that has outperformed is the one picked from the BSE-200 index and analysed for return over the past three years.

Now, 2 or 3 years are small periods to back-test a hypothesis, but then this analysis proves that Indian monkeys may not have been as lucky as their American counterparts in beating the stock market through their dart throwing skills.

As far as the American monkeys are concerned, as per the above-mentioned research, they were asked to dart-pick 30 stocks from a 1,000 stock universe. Now, when a monkey (or anyone else) would throw darts at 1,000 stocks, there is a greater probability of hitting a “small and micro-cap stock” than a “large or mid-cap stock”, simply given the bigger universe of the former.

And as we know that small companies have generally outperformed big companies in the past, this is how the American monkeys have beaten the US market, represented by 30 large-cap stocks.

Here is one more difference between the Indian and US situations. When you look at the performance charts I have shown above, the biggest disappointment my monkey faced was while dealing with the BSE-500 index, which is made up of most number of small-cap stocks as compared to the other two indices – BSE-200 and BSE-Sensex.

So, over the past two and three years, small companies in Indian have fared worse than their larger peers. This is unlike the US situation, though over a longer term period.

As far as Indian monkeys and their dart throwing skill is concerned, I find one big reason they may not outperform the broader markets even in the future. That one reason is…

Corporate Mis-Governance
To say the least, corporate governance standards in India are worse than in the US. While a few American corporate scams have been much bigger than those that have been reported in India, the malaise is more widespread here than there. Plus, very few corporate crimes get reported in India, so we do not know how deep this malaise is.

And thus, there is a great probability that if you employ a monkey to throw darts at stock tables, there is a great probability that it may hit upon a few companies that are indulging in some or the other activities of corporate mis-governance.

That’s why, it’s very important to be very careful of the kind of companies you are buying in India, because there is a great probability of you stepping on a landmine if you don’t know what you are stepping onto.

Now you may wonder – “Is there no hope to find honest businesses in India?”

Yes, there is, I believe. There are companies that go about their businesses as usual – without bothering to play around with numbers and governance standards.

These are among the simple businesses, which need no or minimal debt to grow (when a company has too much debt, be doubtful), generate ample amount of cash, and have history of not cheating on their shareholders.

Only you, through a careful analysis, can identify such businesses. A monkey, even if it is the best dart-thrower in the world and may consider itself as a future fund manager, won’t be able to help you a bit in this regard.

Yes, you may want to play it ultra-safe by investing through index funds – that have beaten Indian monkeys in the past. But carefully selected business (and just a few) can still be your biggest winners 20 years down the line.

Investing is, after all, all about knowing your advantages and your disadvantages, and not playing a game you have no advantages in.

So, if you can build an advantage in stock picking, you don’t need a monkey to do it for you.

Still not convinced? Hire a monkey and try it for yourself! (But please don’t hurt the monkey, if it underperforms!)

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.


  1. Interesting read.

  2. This seems to be on the funny side.
    On a more serious note I doubt if it works in real life.
    I think instead of randomly picking up stocks, doing a fair amount of homework before putting your hard earned money in a stock is far more reassuring. Yes re-assessing from time to time is equally important.
    But, I guess, to each one his own techniques of throwing darts !!

  3. The only problem I have with your analysis is that you have compared only 2 and 3 years returns and that too you have chosen any arbitrary date for comparison (March 2012 and March 2011) . Using arbitrary dates and arbitrary periods even FD returns(or pretty much anything) can be shown to beat stock indexes. It would have been a much better analysis had rolling returns over 5 years been used.

    Having said that, I agree to certain points in your article that hardwork and research is needed to judge things like corporate governance etc, And we have seen that in last 5 years the index has gone down and came to same level again but there are many good stocks in large, medium and small caps which have grown multifold. So analysis and research can help finding such gems.

  4. Nelson Christian says:

    I recall reading about a similar “monkey portfolio” experiment on Firstpost.

    But this post has gone into great detail and depth about why the out performance was not achieved. Many investment greats have advocated that if one does not have the time/inclination/ability/interest to invest directly in stocks, then low cost index funds are the way to go.

  5. Abhijeet says:

    Good article Vishal. It got me curious and I ran some analytics on my historical data. In past 8 years, considering companies with average & median daily turnover of at least 5 & 2.5 lakhs respectively, I got a little more than 2 million records (about a 1000 companies everyday for about 2000 days).

    These 2 million records overall gave 1.85 % return over a period of 6 months, but compared to sensex, they gave -3.42% returns. So you are right about small companies not doing as well as big companies. However when I did the same for companies which are listed in FnO (to try and mirror BSE-100 & BSE-200), the performance increase to 6.79% absolute and -1.02% relative to sensex. Again your random sample observations hold good if we expand them to all the stocks in BSE universe.

    And I totally agree with you on corporate governance not being as good in India and this causing underperforance of small companies stocks simply because their numbers are not trustworthy. A liar saying that he earned a 10 million dollars is equally worthless info as him saying he earned a million dollars.

    However I don’t agree with you on the continued abundance of this malaise in India. You may call it wishful thinking but I believe things will get better, hopefully sooner rather than later. Lets hope for the best 🙂

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