Monday, September 30, 2013

Monkeys Beat Cap Weighted Indices

They also beat Cramer, but that's a different post.
From the Cass Business School, City U., London, April 4, 2013:
Researchers at Cass Business School have found that equity indices constructed randomly by 'monkeys' would have produced higher risk-adjusted returns than an equivalent market capitalisation-weighted index over the last 40 years.

A study based on monthly US share data from 1968 to 2011 found nearly all 10 million indices weighted by chance delivered vastly superior returns to the market cap approach - a discovery likely to come as a blow to investors that have billions of dollars worldwide invested on a market cap-weighted basis.

The finding comes from two papers* published by Cass Business School's Cass Consulting, and sponsored by Aon Hewitt, which investigated alternative methods of constructing equity indices.

Co-author Professor Andrew Clare, explained: "We programmed a computer to randomly pick and weight each of the 1,000 stocks in the sample; we effectively simulated the stock-picking abilities of a monkey. The process was repeated 10 million times over each of the 43 years of the study.

"The results of this experiment showed that many of the monkey fund managers would have generated a superior performance than was produced by some of the alternative indexing techniques. However, perhaps most shockingly we found that nearly every one of the 10 million monkey fund managers beat the performance of the market cap-weighted index."...MORE
...Out of the alternative indices, the Sales-weighted index performed the best, beating 99 per cent of the monkeys' randomly constructed indices.
* 'An evaluation of alternative equity indices. Part 1: Heuristic and optimised weighting schemes' and 'An evaluation of alternative equity indices. Part 2: Fundamental weighting schemes' by Professor Andrew Clare, Dr Nick Motson and Professor Steve Thomas of Cass Business School. The study was conducted by Cass Consulting for Aon Hewitt.
Download Paper 1
Download Paper 2
See also:
Commodity traders superior to chimpanzees, research shows
I made a serious career track mistake.
Years ago a counselor pointed out that I seemed to have an affinity for animals (It's true. Kids and dogs like me. So do drunks and folks suffering from various psychopathologies).
Had I followed up on her thinking I would now be tenured, trading outside my species and living the grant-proposal dream....
 ...chimpanzees in nature do not store property and thus would have little opportunity to trade commodities...
Jim Cramer beats Monkey in Stock Picking Contest!
(for one week only, the monkey is ahead on performance: see below)
"...You know what – I don’t work for Murdoch”

Cramer; Aug. 20 show. Then he said let Cramer be Cramer or something, I wasn't paying attention, I was reading Warren Buffett's story about arbitraging cocoa beans against an equity.

Turns out Cramer was responding to the Barron's story
"Shorting Cramer" which had this line:
When we asked Cramer and CNBC for their own records of Mad Money's stock-picking performance, they had more excuses than a Tour de France cyclist dodging a blood test. They complained that the list from contained some stocks from the program's "Lightning Round," in which Cramer gives a quick analysis and a buy or sell decision on stocks phoned in live by viewers. These, they argued, shouldn't count in our tally.