As seen in

The Time a Team of Professional Stock-Pickers Was Beaten by a Cat – – Presented by Mark K. Lund, Financial Advisor in Utah

Back in 2012 the U.K. based Observer newspaper decided to test the performance of their panel of professional stock-pickers. In a three-way contest they pitted the trio of investment professionals against a team of finance students and a house cat named Orlando.1

According to the story, at the start of the year each team was given an imaginary £5000 (about $5,700 USD) to invest hypothetically in five companies from the FTSE All-Share index. Every three months they had the option of exchanging any of the five stocks, as long as they replaced them with others from the same index.

Writing for the Observer, Mark King said that while the professionals used their decades of investment knowledge and traditional stock-picking methods, the cat selected stocks by throwing his favorite toy mouse on a grid of numbers allocated to different companies in the same index. There was no mention of how the students made their choices.

Through the first three quarters of the year the professionals seemed poised to win the contest. But in the fourth quarter they decided to hold onto such “sure bets” as British Gas and Imagination Technologies, both of which went on to decline by double digits.

Orlando the cat, however, continued to make trades, which were fortunate enough to propel him into the lead for the entire year.

About the lesson learned, King wrote, “The result indicates that the ‘random walk hypothesis’ popularized in Burton Malkiel’s A Random Walk Down Wall Street, is perhaps truer than we thought.”

Malkiel famously demonstrated that share prices move randomly because of new information, making stock markets essentially unpredictable.

In 2012 the market went through several significant corrections followed by dramatic recoveries. Even looking back with 20-20 hindsight, it’s hard to pinpoint exactly why stocks performed the way they did. No wonder the experts got it wrong.

But the Observer missed a big opportunity with its yearlong demonstration. They should have added one more animal to the contest—a goldfish. One that makes no stock picks. If they had given that goldfish £5000 worth of the S&P 500 index and he had swum around all year making no changes, he would have beaten the cat’s hypothetical returns by 18%.2 (Orlando “made” 10.8% for 2012. The S&P 500 made 13%.)

Many people believe that investing for retirement is mostly about making the right stock picks. But disciplined, diversified asset allocation helps reduce risk in your pursuit of long-term investing success. Your strategy should be part of a broader plan carefully tailored to your situation, one that considers the unpredictable nature of global markets. And then you need a trusted professional to help you navigate the emotional ups and downs that come with investing, holding you accountable to do the right thing no matter how you’re feeling.

No cat or goldfish can do all that.

If you ever have any questions about your investments or retirement plans, please feel free to give me a call at 801-545-0696.

Regards,
Mark Lund
Stonecreek Wealth Advisors, Inc., A Financial Advisor in Utah
11576 S State Street, Bldg. 1002
Draper, UT 84020

Sources:
1. http://go.pardot.com/e/91522/n-13-investments-stock-picking/848wpg/1667947192?h=feLza2SPDRS2oDKtDpj3GrOCYKmS2IwX6er4DWwY7Z8
2. http://go.pardot.com/e/91522/hy-2012-good-year-stock-market/848wpk/1667947192?h=feLza2SPDRS2oDKtDpj3GrOCYKmS2IwX6er4DWwY7Z8

This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by Efficient Advisors, LLC (“EA’) for Mark Lund, Mark is a Financial Advisor in Utah. He is known as a Wealth Advisor, The 401k Advisor, Investor Coach, Financial Planner, Investment Advisor and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. a fiduciary, independent, fee-only, Registered Investment Advisor firm providing investment management and retirement planning for individuals and 401k consulting for small businesses. Mark’s newsletter is called The Effective Investor Newsletter. Cities served in Utah are: Salt Lake City, Salt Lake County, Utah County, Park City, Murray City, West Jordan City, Sandy City, Draper City, South Jordan City, Provo City, Orem City, Lehi City, Highland City, Alpine City, American Fork City. The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.

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