Wednesday, July 04, 2012

Do you rely on an expert,a monkey or superstition?

I have tried dabbling in shares at various times. but I have never been able to crack the system. I always end up losing money. One day, an investment agent came and gave me a long talk on how such sensitive matters ought to be entrusted to professionals ( for example, him) , how one needed to track the fundamentals, technicals,  sectoral trends,  dollar rate, RBI’s repo and reverse-repo rate, monsoon, agriculture, GDP and so on. A layman not equipped with all this information will be walking practically naked in the stock market, he said. 

So I trusted that chap and invested in some mutual funds that he recommended. His assurance of 18% returns sounded quite tempting. Only later did I realise that what he had meant was that I would get back 18% of what I had invested. 

I gave up convinced that the stock market obeyed no laws of nature or economics.  Dalal Street is littered with corpses of gullible investors who had hoped to see a bull run, but didn’t even see it walk. 

Many believe that the market works at random and there is absolutely no method in the madness. So, if you were to pick up some stocks at random and invest in them, the ‘returns’ will be no different from that on stocks recommended by professionals.  The Monkey Portfolio sprang from this premise. As this report explains:

The Monkey Portfolio is a portfolio created on a purely random basis. No deliberate calculations or analyses have been done to include or exclude any stock. In other words, any monkey could have picked the stocks!
However, it’s not 100 percent chance we are talking about. Like investing in index stocks, we have limited our random picks to stocks in two indices of the Bombay Stock Exchange — the BSE 100 and the BSE 500. Assuming that the indices are composed only of well-traded and relevant stocks, the randomness of the choices our Monkey makes relate only to stocks within these two indices.

We have created two portfolios of 10 randomly chosen stocks each and will track their performance against the two top indices, the Sensex and the Nifty, in the coming weeks and months.

We will also be shortly creating an expert portfolio comprising stocks recommended by professional stock pickers. We hope they will outperform our Monkey — or Monkeys, since we have two such portfolios.
 So far, the Monkey portfolio has done as well or better than the expert portfolio.

Another way of tackling the Stock Market is by requisitioning the services of astrologers. They are known to predict the future, aren’t they?  The “Superstitious Stock Fund” started by Shing Tat Chang in the UK, works on an algorithm controlled by human superstition. As this report explains: 

The fund trades stock based on numerology, astrology, and a self-taught logic built on its successes and failures. So, it’s a non-living entity that makes random decisions just like your average irrational human would. 

Chung invited people to invest a few pounds in the fund before it launched, and ended up receiving almost £5,000, which is now in play on the FTSE 100 Index. At the end of this year, the investors will receive returns based on the fund’s performance--or, you know, they won’t. He says he isn’t betting on whether his robot will ultimately put his investors in the red, but he’s already lining up investors for a second round in 2013. 

So, the Stock market can be used to test out different belief systems and make a proper comparison at the end of a year in the following manner. On Jan 1st of the year, invest Rs 1,00,000 each in the Expert Portfolio, Monkey Portfolio and the Superstitious Fund. Track the movement. On Dec 31st, compare and determine which of the three has given the best returns. The winning ‘belief system’ should then be upheld as the right and the most desirable one for the Stock Market. 

In fact, the results of the experiment can be extrapolated to other areas of life. Should we take decisions ( job, market, cars, marriage) based on cold data and analysis ( Expert), or randomly and whimsically ( Monkey), or place our faith in astrology, numerology and vastu.


ramesh said...

if the god portfolio wins then it will be a defintive proof of the divine :P

Balajisblog said...

Raj - How dare you question Lord Hanuman's wisdom ?

Raj said...

ramesh: Yes. Same with the monkey and the expert.

Balaji: Good point.