“…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.“
-Burton Malkiel
Hopefully Burt doesn’t expect us to take such a statement seriously. I mean, like anyone could even know that anyways. The only way to prove such a statement would be to replicate such a situation…which just happens to be what some have done.
The Wall Street Journal created the dart board contest in 1988. The staffers were the monkeys (the humor of which is not lost) and they threw darts at a newspaper. In 100 different contests, they tested the dartboard stocks against the professionally picked stocks. The professionals won 61 times. Hooray! But wait a minute…that means that the monkeys won 39 times.
Similarly, Research Affiliates has studied this scenario from 1964-2010 and found that the monkey stocks outperformed the market by an average 1.7%.
Professional?
Isn’t it interesting that there are a lot of people who’s full time job is to analyze stocks? They all look at the same companies, the same products, the same potential, and the same numbers, and yet can come to very different conclusions. The monkey test seems to prove that there must not be anything concrete about picking stocks. Its completely arbitrary. It’s nothing but the luck of rolling a 7. Or it’s the dumb luck of getting stuck with the Old Maid card.
That conclusion would ignore the fact that there are people who consistently outperform their peers. Warren Buffett, Peter Lynch, and George Soros are just a couple of names that come to mind. Somehow, these guys have some sort of insight beyond the tangibles that everyone else has. They don’t hold the proverbial crystal ball, but maybe they are looking for something more than we are. So what can we learn from the greats?
Warren Buffett
“Be greedy when others are fearful.“
This must be the most often quoted thing that Buffett ever said. Practicing what he preaches, Buffett continues to add to his position in Wells Fargo & Co (NYSE:WFC). Many people are still fearful of the banking sector. One needs only look at what has been going on in Cyprus these days to be reminded that there are still major global financial concerns. Some wonder if the recovery we have experienced these last couple of years is even real at all, or just a game some Wall Street tycoons are playing.
WFC Total Return Price data by YCharts
Over the last three years, Wells Fargo & Co (NYSE:WFC) hasn’t quite kept up with the S&P 500. This might cause one to question Mr. Buffett’s advice and logic in this particular case. But 43% is nothing to sneeze at, and there might be another metric that will prove relevant here.
WFC PE Ratio TTM data by YCharts
While Wells Fargo & Co (NYSE:WFC)’s total return has risen over 40% in the last 3 years, we see that their valuation hasn’t kept up with earnings. Their price to earnings ratio is down nearly 30% during that same period. This suggests that Buffett isn’t as crazy as he seems, and there may still be something left here for value investors.
Peter Lynch
“Although it’s easy to forget sometimes, a share is not a lottery ticket. It’s part ownership of a business.“
Investing is a business partnership in a way, and that is something that needs to be remembered. Sometimes two companies can be in the same industry, have identical business models, and have similar numbers, but only one is the better business. This issue is the reason some investors prefer Ford Motor Company (NYSE:F) over General Motors Company (NYSE:GM).
Perhaps it’s just a matter of principle, but I prefer to be part of a business that doesn’t take government help.
F Net Income TTM data by YCharts
While the numbers still aren’t completely peachy for Ford, it is pretty impressive what they have been able to do since the financial crisis in 2008. They have swung from a huge loss to more than a $5 billion profit.
As you look to long term growth prospects, you have to be happy about the Ford EcoBoost engine. While not entirely new, this engine has been increasing fuel efficiency without sacrificing engine power. Fuel efficiency is needed to comply with government regulations, while engine power is needed to keep costumers happy. Recently Ford Motor Company (NYSE:F) announced that soon they’ll be adding this engine to even more vehicles in their lineup, and will be making them right in the USA.
I think it’s important to realize that you need both the fuel efficiency and the engine power if you are going to be relevant in the auto market. You can’t ignore fuel efficiency because the government requires it. But you can’t throw customers under the bus with vehicles that under perform. Ford seems to be finding a good balance between the two.
George Soros
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.“
Putting that philosophy into practice, Soros continues to buy Wal-Mart Stores, Inc. (NYSE:WMT). Is that boring enough for you? I mean, who wants to invest in Wal-Mart anymore, when there are so many exciting investments like 3D printing and experimental pharmaceutics?
WMT Revenue TTM data by YCharts
It may seem boring at this point, but the numbers are hard to argue with. Every important metric just continues to rise, except for their price to earnings ratio. But where is the continued growth for Wal-Mart? Right now, they are focusing their efforts online. Only 2% of sales are currently made on the internet, but Wal-Mart is hoping to leverage their huge store count to improve online sales through the use of lockers, a place in the Wal-Mart store that you can pick up goods ordered online.
Conclusion
The only thing you can learn from a monkey is “monkey see monkey do.” Some people beat the market consistently for good reason. Learning the valuable lessons they have to teach can make you a better investor, and will allow you to imitate those things that have made them great.
The article Return of the Blindfolded Dart Throwing Monkeys originally appeared on Fool.com and is written by Jon Quast.
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