Monkeys on Wall Street
There is a common misconception around investing (and Wall Street); many people think that you have to be intelligent to outsmart everyone. It has been proven that it is impossible to improve your odds beyond the average. All the investment managers, brokers and quants (quantitative analysts) are no better at picking stocks than monkeys. Nobody knows if the stock market will go up or down. Because of this misconception, many people give their money to investment firms to invest their money for them in exchange for a fee.
Burton Malkiel is an economist and author for a famous financial book known as A Random Walk Down Wall Street. In this book, he famously wrote: “The stock market can not be consistently predicted by any theory. The only predictable thing we have about the market is that the whole thing tends to increase over time. No one is able to consistently pick winners over anyone else.” He goes on to write: “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” This is why the best way of investing is through low cost index funds. Holding passive ETFs that track the wider portion of the market with extremely low management fees is the way to go. There are hundreds of studies and articles about this as this is one of the most surprising findings. Over the past 90 years, over 90% of index funds outperform actively managed funds when you account for their fees. That basically means that monkeys are outperforming experts on Wall Street. Even with the 10% of funds that do outperform, they cannot consistently do it year over year. After 5 years, there are almost 0 firms that outperform consecutively, meaning that it is really just luck that there will be a few winners from thousands of investors. Even Warren Buffet, the person that outperformed the market, when asked in an interview what people should invest in, recommended index funds.
With that said, a lot of my friends (including myself) love to browse the subreddit community of r/Wallstreetbets. They post hilarious memes with crazy gains and losses. I do not support their philosophy of risking a large amount of capital to chase big gains and losses, but if you want to join them, I recommend setting aside only a little bit of money that you are comfortable with losing. I have to confess that I do in fact partake in this, but I make sure to keep my money on a different account with only money I am okay with losing. Think of it as gambling or fun money.
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