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Investing Basics

Cats Pick Stocks Better than Professional Wealth Managers

It’s the story all index investors love to hear – ordinary housecats beating professionals in a yearlong stock picking challenge.

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: January 23, 2013

Here's the bottom line: Learn more about Betterment

The challenge, dreamed up by Britain’s The Observer, pitted three professionals, a class of students from a secondary school in Hertfordshire, and a marmalade cat – Orlando – against each other. Each was allowed to invest £5,000 in any five companies on the FTSE All-Share index. At the end of each quarter, the challengers could sell stocks, and replace them with others from the index.

The professionals used their decades of experience to select stocks; the students their research and instinct; while the Cat’s preferred method involved throwing his favorite toy mouse on a grid of numbers allocated to different companies.

Things started out well for the pros – the wealth manager, broker, and fund manager – who were in lead by the end of the third quarter. An unexpected turn around in the last quarter upset the balance, with Orlando coming out on top, the wealth managers pulling in behind him, and the poor students making a loss (according to their teacher they made the early mistake of selecting companies in risky areas).

The lesson for us all?

If you can’t predict the future – and no one can – you shouldn’t be picking stocks. If you already have a full time job doing something else, chances are you don’t have time for another full time job managing your money.

You can leave it to the professionals, or Orlando, or you can invest in a diversified portfolio that tracks the index.

We should add that while it’s fun to laugh at the suits, this is too small a sample to say all professional stock pickers will be beaten by a tabby. After all, we’ve all heard the stories of “my guy” who gets above average returns. But while that may be true in some instances, it’s very hard for any professional to consistently do so. Professor Eugene F. Fama of the University of Chicago Booth School of Business goes as far as to say that any success in active trading is sheer luck.

What do you think?

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