Could a Blindfolded Monkey — Throwing Darts at Stocks — Beat the Experts?

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Who doesn’t love a throwdown? Some friendly competition?

Especially with real money on the line?

It’s time to Play the Ultimate Match: let’s see what happens when I face-off against 14 finance bloggers in an Investing Throwdown!

“The what?! Throwdown?!”

“Are you drunk?”

Yeah, yeah, I know. I wrote that intro with my best WWE sports announcer voice running through my head. Grrr!

#NeverWatchedWrestling

#AndHadToGoogleTheAcronym

Okay, fine. Competition ain’t my style.

But I do love a challenge. So when a handful of finance bloggers challenged me to beat their investments in a quest for the ultimate investing triumph, I thought:

“Game on.”

Here’s how this breaks down:

#1: On January 1, fourteen finance bloggers – including yours truly – invested $1,000 into the stock market.
#2: We picked any investments – stocks, index funds, ETFs, bonds.
#3: We can place trades as much (or as little) as we want throughout the year.
#4: We track our progress for a year.
#5: We crown a victor. Victory!!

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If I win, I demand a diamond-studded crown. Okay, fine, cubic zirconia.

Let me take a moment to say: I realize we’re making investing sound like a sport. And it’s not a sport. It’s a sober, analytical … zzzz.

Here’s the deal:

I think investing is awesome. Maybe you do, too.

But there are millions of people who associate “investing” with stodgy and stuffy and boring.

So I want to get people pumped. I want you to leap off your couch and yell, “Bring it on!!”

And when 2014 is over, I want you to keep investing …

… in index funds or ETFs or stocks or real estate ….

…. for the rest of your life.

You MUST invest to grow wealth. Plain and simple. So I’m trying to make investing awesome.

Now: It’s time for some friendly competition. Let’s roll!

Can A Blindfolded Monkey Beat the Financial Experts?

In 1973, Princeton professor Burton Malkiel wrote a must-read book called A Random Walk Down Wall Street. It became a mega-bestseller and is now regarded as an investing classic.

“A blindfolded monkey throwing darts at a newspaper’s financial pages could beat most experts,” Malkiel famously asserted in the book. (That line is classic pop-wisdom among the Investing Geek crowd.)

I want to test if that’s true. But I can’t find an actual monkey.

So I’m going to imitate a monkey, instead. (It isn’t a far stretch.)

Here’s my 3-step investing strategy:

Step 1: Blindfold myself.
Step 2: Throw darts at a list of stocks.
Step 3: Buy stocks.

How many stocks? Ideally, I’d love to sink $100 into 10 stocks. I don’t want to sink the entire $1,000 into just one company. #Risky

The problem? Fees. Most companies charge $4 – $10 each time you place a trade.

That means I can’t buy 10 different types of stocks. I’d lose $200 in transaction fees — $100 when I buy and $100 when I sell.

That’s a 20 percent loss – right off the bat. Ouch!

But I did some digging, and I discovered a company called Loyal3, which lets me buy-and-sell stocks with zero commissions or fees.

It’s totally free.

F-R-E-E.

Score!!

(They also have this cool program where you can invest in IPOs – also without fees – with a minimum investment of $100. Throw them your email address and they’ll ping you the next time they have a mouthwatering IPO.)

So … time to pick the players. Which companies will compete on my team? Check out this one-minute video:


(If you can’t see the video, here’s a direct link to it on YouTube.)
And the winners are ….

  • Berkshire Hathaway
  • Discovery Communications
  • Kelloggs
  • Nokia
  • Nike
  • PVH
  • Unilever
  • VF Corporation
  • Viacom
  • Walmart

Here’s what I did.

On Christmas Day, I moved $1,000 into my Loyal3 account. On New Year’s Day, I bought $100 worth of each of these companies. Let the games begin!

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But wait!! I need to compare this to some alternative.

So I’ve created 3 other options:

#1: I’m going to “dollar-cost average” into one of the companies on my list of 10.

I randomly picked Berkshire Hathaway, the company managed by legendary investor Warren Buffet. I’ll automatically invest $83.33 per month ($1,000 per year) into the company.

For those of you who aren’t familiar with this concept: “Dollar-cost averaging” is an automatic way to buy low, sell high. (Or at least, “buy low, don’t-buy high.”)

How? It’s simple. When stock prices are high, $83 buys fewer shares. When stock prices are low, $83 affords more shares.

Hypothetical Example:
Month 1 – Stock Price $83 — $83 Buys 1 Share
Month 2 – Stock Price $60 — $83 Buys 1.38 Shares
Month 3 – Stock Price $110 — $83 Buys 0.75 Shares

In the past, normal people couldn’t dollar-cost average into company stocks. The transaction fees were too high. People dollar-cost averaged into index funds or ETFs, but they couldn’t slowly dip into stocks.

But “free” is a game-changer.

Now that we can transact for free through Loyal3, I’m going to dollar-cost average into one company’s stock …. and see what happens.

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Will it beat Berkshire Hathaway’s overall performance (from Jan 1 – Dec 31)?
Will it lag?

We’ll find out.

#2: As a “safety benchmark,” I stuck another $2,000 into an EverBank Money Market account.

Everbank offers one of the highest interest rates on the market — 1.10% for the first 6 months, and 0.86% APR throughout the year – so this investment will be the benchmark comparison between “playing it safe” in a high-interest money market account.

They require $1,500 to open the account, so — to simplify things — I rounded up to $2,000, and I’ll divide my gains by half when I’m reporting the results on this blog.

#3: Finally, we’ll watch how the overall market performs throughout this year. We’ll compare our stock performance to the general economy … and see who wins.

****

Let me end with a few disclaimers:

#1: There ain’t nothin’ scientific about this. It’s an experiment. A quest for victory. A game (of thrones.) It’s not intended to “prove” anything. Don’t draw any conclusions from the results. This is just for laughs.

#2: Stick with index funds for the vast majority of your portfolio. Invest in stocks with your “fun money” – that extra 10 percent you’ll use to take some risks.

#3: Don’t throw darts, while blindfolded, when your boyfriend is standing in the line-of-fire. #Oops

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Full Disclosure: Some of the links in the post above are “affiliate links.” This means if you click on the link and purchase the item, I will receive an affiliate commission. It won’t cost you anything extra. I only recommend products or services I use personally and believe will benefit my readers.

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25 Responses to “Could a Blindfolded Monkey — Throwing Darts at Stocks — Beat the Experts?”

  1. Julie Rains
    08. Jan, 2014 at 6:38 pm #

    Love your picks, esp. Nike and Berkshire Hathaway. I also like the way you are using Loyal3 to buy your stocks and the explanation of dollar-cost averaging. I have invested in direct purchase programs before and like the way you can invest any amount of money. I have not yet tried Loyal3 (though I enjoyed their talk at FinCon13) and love that they are offering IPOs. Good luck!

  2. Kali @ CommonSenseMillennial
    08. Jan, 2014 at 9:52 pm #

    I love this! I can’t wait to see how everyone involved does with the challenge this year. This is definitely an interesting twist and I love that you got creative with your $1000!

  3. Jason
    09. Jan, 2014 at 1:26 am #

    I really enjoyed this article. Good luck in the contest. I will have to look into Loyal3 too, I’m very curious how they make any money with a no fee structure.

    Dollar cost averaging isn’t really a way of buying low. Theoretically it results in a higher expected cost but the real benefit is reduced volatility – you’re not as likely to buy really high (or really low). Your dollar cost averaged scenario will likely move in the same direction but at a smaller magnitude since the money is in the market for a much smaller amount of time.

    Also, wasn’t part of the monkey’s advantage a small cap bias? The list of stocks in the paper would contain a disproportionate amount of small caps, and there’s a theoretical small cap risk premium that may result in greater expected returns over the long run. I only ask because it looks like your board was mainly large caps.

    • Afford Anything
      09. Jan, 2014 at 4:38 pm #

      Ah yes, the board is mostly large-caps! The small-cap bias might improve results over the long-term, though (like you said) it will increase volatility over the span of one-year. I’m curious to see how this plays out, since (after all) it’s only running for a single year ….

      Let the games begin! :-)

  4. Mike
    09. Jan, 2014 at 6:29 am #

    Great read, can’t wait to follow the results. I’ll have to check out Loyal3 with their zero to no fees.

  5. Charles@gettingarichlife
    09. Jan, 2014 at 6:59 am #

    Paula,
    Those companies you have on that list are pretty good. I know I can’t beat the market but I do still love my individual stocks. You are right when you need to keep investing. The most money I have ever made off my investments were those that I initially lost a lot of money on. Bought in the bear market and continued to lose every month, but since I was investing for the long term it didn’t matter.

    • Afford Anything
      09. Jan, 2014 at 4:35 pm #

      @Charles — That’s what I love about long-term investing … the bear market losses don’t matter as much when you’re in it for the long-haul. :-)

  6. Steven
    09. Jan, 2014 at 3:23 pm #

    Fun article, will be interested to see the monthly/quarterly reports on how everyone’s doing.

    How did you decide who was on the dartboard? Loyal3 sounds like a great idea, I’ll have to read some more about it, thank you. I currently use Tradeking formely Zecco and they are at $5 per trade.

    • Afford Anything
      09. Jan, 2014 at 4:34 pm #

      @Steven — Loyal3 doesn’t offer every stock on the market … they mostly offer large-cap companies. Those are the companies that are featured on the dartboard. I figure that’s a fantastic trade-off for being able to buy-and-sell for free (and I can always use a different trading platform for small-cap companies.) :-)

  7. Done by Forty
    09. Jan, 2014 at 3:56 pm #

    Hilarious! I love that you’re using real money to test the theory. I’m rooting for the blind monkey to win out!

  8. Romeo
    09. Jan, 2014 at 6:52 pm #

    I may be a bit biased but I’m rooting for Latisha over at Young Finances, although I do secretly believe that Malkiel is correct. :-) Good Luck and nice video!

    • Afford Anything
      09. Jan, 2014 at 8:09 pm #

      @Romeo — LaTisha is one of my closest friends, as well as my podcast co-host, so I’ll be thrilled if she wins this throwdown. :-) This will be a fun year!!

  9. LaTisha
    09. Jan, 2014 at 9:36 pm #

    You look amazing in the video! (I see more in your future…)

    I love the concept and while I’m biased as well, I can appreciate the ‘science’ behind your method. Good luck!

  10. Capt Jill
    10. Jan, 2014 at 7:01 pm #

    I thought it was pretty weird that all the stocks you picked were such large, well-known, already successful companies. I see in earlier comments that it was because your broker only had those stocks to choose.
    Seems to me that will skew the results and makes it not really a useful experiment.
    I do like that you were able to find a broker that would allow you to trade for free. That alone will earn you more profits if there are any to be made!
    Personally, I stick mostly to penny stocks. Just seems to me that its easier for a $1 company to double than it is for a $100 company to do that. Plus, its easier for me to plop down $100 on 100 shares of something and take a chance, then for just ONE share. It’s probably not logical but it works for me. ;-)

  11. Money Saving
    11. Jan, 2014 at 9:12 am #

    Sounds very fun :-) I’ll be interested to see how things work out. I’m sure you’ll do better than at least half the folks just by throwing darts :-)

  12. Deia @ Nomad Wallet
    12. Jan, 2014 at 9:02 pm #

    I love this! I’ll be following to see how you fare. :D Going to business school killed any interest I had in stocks. I had a long conversation with myself after finding out how little I know about predicting stock movements even after taking multiple university courses. And forget fresh grads, professional fund managers underperform compared to the index 80% of the time. Trying to beat the market is madness and the only logical way to invest is through index funds. That or become a broker and become rich through commissions from disillusioned people who are trying to beat the market. ;)

  13. Carl
    13. Jan, 2014 at 2:08 pm #

    I saw an article on Loyal3 and checked out the site recently. The one question that I had that maybe you can answer is how does it handle if you buy more or less than a share of the stock (like in your example where the $83 invested each month sometimes buys 1.15 shares and sometimes buys .75 shares)? Does it hold the extra money until you put in enough to buy another share, just deposit it back into your account, or does it actually say you own .75 of a stock?

    • Afford Anything
      13. Jan, 2014 at 4:51 pm #

      @Carl — Great question. Loyal3 allows you to buy fractions of shares. So $83 will allow me to buy 1.15 shares in some months, and 0.75 shares in other months. It allowed me to buy exactly $100 worth of each of those 10 companies’ stocks, regardless of the trading price of each share.

  14. Eric
    13. Jan, 2014 at 6:42 pm #

    I actually did something very similar (we blindfolded someone with a highlighter) and he picked a portfolio of stocks and we compared to Jim Cramer from CNBC over a period of time. Our monkey did much better than the TV expert!

    • Afford Anything
      17. Jan, 2014 at 4:31 pm #

      @Eric — Haha, that’s awesome! (And a highlighter sounds WAAYYY less dangerous than throwing darts …)

  15. Little House
    15. Jan, 2014 at 9:54 am #

    The Loyal3 sounds interesting. I’m going to have to look into this; no fees, free trades..wow! I’m curious to see how your investments do. Good luck!

  16. Joe @Stacking Benjamins
    15. Jan, 2014 at 8:18 pm #

    I loved talking to Matt from Loyal3 for our podcast interview. It’s a great concept that I hope takes off.

    Paula throwing darts blindfolded? That scares the hell out of me.

  17. Jack @ Enwealthen
    18. Jan, 2014 at 8:52 am #

    Thanks for the tip on Loyal3, sounds interesting.

    Question: Those are some really nice picks you have. It looks like you’re only picking 10 from 55 vs thousands. How did you pick the stocks for your dartboard?

  18. Marie @ PF Pro
    27. Jun, 2014 at 1:29 am #

    I’ve been investing with Loyal3 since the beginning and had some pretty good results. I just wrote an article about how I racked up 100,000 miles and $200 with Loyal3.

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