Poo Flinging Monkeys And Investment Advice

One of the more frequent questions we get in times like this is “What do you think the markets will do?” I don’t know over the short term — seriously, not a clue. But for those seeking clarity, there’s no shortage of poo flinging monkeys who will answer that question. Just turn on the financial news channels.

Here are four we received this week in our Inbox:

  • Why Another Big Stock Market Drop is Brewing
  • Today’s stock market looks like March 2009, before the longest bull run in history, says Morgan Stanley’s Mike Wilson
  • Powell Warns of a Possible Sustained Recession From Pandemic
  • After Devastating Economic Contraction, Glimmers of Growth Emerge Daily and weekly data suggest a recovery might be brewing, though its strength is unclear

Down, up, down, maybe up. Clear as mud.

There are two reasons not to listen to these experts. First, the academic research indicates these so-called experts don’t have much of a clue of what will happen in the market. Second, picking one of the experts or viewpoints and making investment changes based on that choice increases portfolio uncertainty and risk.

Monkey See, Monkey Poo

There is a very popular theory that heavily influences investments these days called the efficient market hypothesis. The idea is that there are so many people trading in the markets, that their collective and competitive wisdom keeps the markets priced about as well as they could be.

This suggests that trying to beat the market is not productive and one should instead lower their investment costs and invest in indexes. There’s plenty of Nobel Prize winning academic research demonstrating investors, including professional investors and money managers, do no better than the indexes on a risk adjusted basis. Sure, some will beat the market. But that is true even under random circumstances.

In fact, according to versions of the theory there’s about a 50% probability anyone can beat the market; even a monkey flinging poo. All the monkey needs to do is layout some sheets of stock listings, fling the poo about, and invest in the “landings.” Out of a 1,000 monkeys, about 500 are going to look clever, and about 5% are going to be pure geniuses. And they won’t hesitate to tell you of their amazing poo.

With the coronavirus disaster, the monkeys are out in force and it’s a giant Kung Poo fight. The economy is going to have a “U” shaped recovery, or a “V”, or it’s going to be a swoosh. Inflation will rage, or deflation will spread. Mmm, smell the poopourri?

Clues Not Poos

Let’s be very clear. There’s always uncertainty about the markets. But we have over 90 years of data on some indexes; through wars, depressions, inflation, and crises. These data reduce the uncertainty.

If we have an odd shaped coin and flip it 10,000 times and it comes up heads 6,032, we can assume the probability of heads is pretty close to 60%. If given a different odd shaped coin and we flip it 10 times and it comes heads 6 times, we have much more uncertainty about its behavior. Investing in the outcome of a future 100 coin flip trial carries far more risk and uncertainty with the second coin.

Historical data isn’t perfect, but it’s helpful when making long-term investment decisions. It provides a reasonable quantitative estimate of risks and returns, and we can construct a portfolio well suited to your time frame and risk tolerance.

On the other hand, we have little reliable data on poo flinging monkeys other than they, as a group, don’t perform better on a risk adjusted basis than the market indexes.

To invest in poo landings introduces uncertainty and risk. Now, instead of an appropriate long-term investment strategy for which we have substantial data, we are selecting less suitable investments based on very little or no reliable data. We’re giving up the known for the unknown, the suitable for the less suitable, and the data for the poo.

The House of Clues

There are several strategies that folks can take in these times that we’ve talked about previously. But one is taking a lesson from the house — and we’re talking casinos here. The house sets the rules so the odds are slightly in its favor. Each dealer is going have players that walk away with a pile of winnings, and in some cases the house loses money. Quite frequently, in fact.

However, the house doesn’t look over the shoulder of each dealer whispering plays and changing strategies. Nope. The dealer sticks to the rules and some players win big. But the house knows that the more games played, the lower the odds of them losing money overall.

The same is true for investing. Instead of worrying about what’s going to happen in the markets tomorrow or this quarter, think about where the market will be in 10 or 20 years from now. That’s a lot of single day bets.

Above all, don’t shift from an appropriate long-term investment strategy to bet on poo flinging monkeys. You might come out smelling like shaving cream.


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