“Paws for thought”: ginger moggie beats the experts

Our thanks to Jim Parker at Dimensional Fund Advisors, for this article originally titled “Cool For Cats”.

You’ve heard the line about stock picking being better left to blindfolded, dart-throwing orangutans. Now there’s new competition – from cats.

UK newspaper The Observer staged an experiment pitting a panel of market professionals and a group of students against a ginger feline called Orlando in a competition to see who would have the most success in picking stocks in 2012.

Each team invested a notional £5,000 in five companies from the FTSE All-Share index at the start of the year. After every three months, they could exchange any stocks, replacing them with others from the index.

The professionals used their experience, insights and market knowledge to select stocks. The cat’s method was rather less elaborate. Orlando simply threw a toy mouse onto a grid of numbers allocated to stocks in the index.

The newspaper reports that while the cat was trailing the pros at the end of the September quarter, his feline intuition kicked in the final months. As a result, his portfolio increased to end 2012 at £5,542. This represented a gain of nearly 11% for the year, outpacing the index’s 8.2% rise and shading the professionals’ portfolio by 7%.

While this experiment was hardly scientific, it does provide another reminder about the difficulty of generating consistent above-market returns by picking individual stocks or making forecasts. And it’s something to keep in mind when you are confronted by media and market prognostications for 2013.

In the US context, Bloomberg highlighted this difficulty recently in a piece entitled Almost All of Wall St Got 2012 Market Calls Wrong. While many forecasters began 2012 by issuing downbeat calls for equity markets – based on the ongoing Euro Zone crisis, China’s slowdown and US political logjams – the market value of global equities increased by about $US6.5 trillion last year. As one analyst quoted by Bloomberg noted, many pundits were too wrapped up in the “fear du jour” and failed to keep an eye on the big picture.

So it was in Australia, where one prominent television finance commentator said at the end of 2011: “The conditions are in place for a panic sell-off. It is not certain that it will happen…but the risk is now such that you must take action. I will be significantly reducing my already reduced exposure to equities possibly to zero”. More fool him and commiserations to anyone who had the misfortune to act on his advice, because the Australian equity market delivered a total return in 2012 of 20% in local currency terms. Gains in many other equity markets were even stronger.

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