A few years back, a popular TV quiz show posed this question in its title: “Are You Smarter Than a 5th-Grader?”
It was a simple idea, as most successful ideas are: An adult plays the game, which offers a cash prize of $1 million.
During the show, a group of 5th-grade students is on stage to rescue the adult if he or she is stumped by a toughie. The questions are drawn from school textbooks.
As the winnings mount, of course, the questions get harder. If the adult fails to complete the challenge or decides to quit rather than lose money, he or she has to admit, on TV, “I’m not smarter than a 5th grader.”
Interestingly, the two $1 million winners during the show’s three-year U.S. run were a superintendent of schools for the state of Georgia and a Nobel Prize-winning physicist from the University of California, Berkeley.
That’s just the nature of TV quiz shows. They are less about raw intelligence than a command of many facts. The kids were prepped for the show, and some were child actors.
The adults, meanwhile, are trapped in a game that most were expected to lose, and they probably knew it. What TV show can blow $1 million an episode in prize money? None.
It was all the more interesting, then, to read about Orlando, a fairly ordinary orange tabby cat from England who “selected” stocks more or less at random by batting a toy mouse onto a grid of stock tickers.
Orlando faced off against a group of professional wealth managers (those poor guys!) and a group of students (kids again…) in a stock-picking contest arranged by the U.K. daily newspaper The Guardian.
As you might have guessed, Orlando cleaned up. Given £5,000 to invest, by the end of the year the house cat’s portfolio was at £5,542.60, the stock pros were at £5,176.60 and the kids lost a bit, coming in at £4,840.
In a sense, it’s unfair. The professionals might have done better in a longer time span. So might the kids. Or worse.
Yet the adult human investors had the clearest idea of the investment window and the most significant incentive: Their reputations were at stake.
There has been a history of absurd random stock-picking ideas. Famously, author and investing legend Burton Malkiel suggested in A Random Walk Down Wall Street that you could get monkeys to toss darts at the financial listings in a newspaper and do just as well as a pro stock picker.
The Wall Street Journal runs a contest using a dartboard against its readers’ picks, just for fun. The dartboard is killing it.
Your house cat investing brain
So what should one make of all this? The takeaways for the retirement investor are simple:
- Individual common stocks often hold more risk than they are worth. Better to own markets.
- Buying and selling many stocks was once cost-prohibitive. Index funds and ETFs make diversification very cost-effective.
- One absolutely must sell high and buy back low, yet avoid trading mistakes and commissions. Rebalancing, the clockwork practice of selling gainers in order to buy more of your temporary “losers,” makes this strategy programmatic.
It must be quite hard for those stock pickers who answered The Guardian’s call for money managers to go up against kids and a cat. It’s one thing to take $100,000 as a consolation prize on a TV show and admit you fell behind some school-age kids.
It’s quite another to realize that an utterly random assortment of stock tickers is likely to outperform people whose claim to relevance in the industry is stock-picking expertise.
It makes one wonder, with good reason, why pick stocks at all?