Thanks for asking (again), Ron!
Let's start with....
A Bit of Dartboarding History
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The "father" of the Dartboard model is William F. Sharpe, Nobel
Laureate in Economic Sciences, 1990, for work based upon his 1964
essay, "The Capital Asset Pricing Model, or Risk/Return Model".
"Modern Portfolio Theory was not yet adolescent in 1960 when William
F. Sharpe, a 26-year-old researcher at the RAND Corporation, a think
tank in Los Angeles, introduced himself to a fellow economist named
Harry Markowitz. Neither of them knew it then, but that casual knock
on Markowitz's office door would forever change how investors valued
securities."
The full article:
Revisiting The Capital Asset Pricing Model, by Jonathan Burton
http://www.stanford.edu/%7Ewfsharpe/art/djam/djam.htm
Sharpe's Articles, Papers, Talks and Cases Available for Direct Viewing:
William F. Sharpe Papers and Articles
http://www.stanford.edu/%7Ewfsharpe/art/art.htm
Another well-known contribution in the field is "A Random Walk down
Wall Street", by Princeton University Professor Burton G. Malkiel.
"The basic random walk premise is that price movements are totally
random. Judging from the chart, the price movements of Newmont Mining
over this 5-month period would appear to be quite random. Prices have
no memory, therefore past and present prices cannot be used to predict
future prices (as implied in technical analysis). Prices move at
random and adjust to new information as it comes available. The
adjustment to this new information is so fast that it is impossible to
profit from it. Furthermore, news and events are also random and
trying to predict these (fundamental analysis) is also a lesson in
futility."
A Random Walk | ChartSchool
http://www.stockcharts.com/education/Overview/randomWalk.html
This work spawned the famous Wall Street Journal Dartboard Contest.
"In 1988 the Wall Street Journal began a contest that was inspired by
Burton Malkiel's book A Random Walk Down Wall Street. In the book, the
Princeton Professor theorized that "a blindfolded monkey throwing
darts at a newspapers financial pages could select a portfolio that
would do just as well as one carefully selected by experts."
The Journal set out to create an entertaining contest to test
Malkiel's theory and give its readers some new investment ideas in the
process. Wall Street Journal staff members typically play the role of
the monkeys (the Journal listed liability insurance as one reason for
not going all the way and actually using live monkeys)."
The Wall Street Journal Dartboard Contest
http://www.investorhome.com/darts.htm
"The idea Prof. Malkiel was explaining is known as the
"efficient-market theory." The theory holds that all available
information is quickly reflected in stock prices, and so all stocks
present equal chances for a gain."
A Brief History of our Contest (A quick, entertaining read ---l)
http://update.wsj.com/public/current/articles/SB907719524729880000.htm
And finally, the recent studies,
In 1995, the following study was published in the Journal Of Financial
And Strategic Decisions:
THE PERFORMANCE OF STOCKS: PROFESSIONAL VERSUS DARTBOARD PICKS
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"This paper evaluates the performance of a portfolio formed on
professional advice (also called pros picks) with another portfolio
picked at random (also called random or dart picks). We study public
announcements of professionals recommendations and random picks from
the ?Investment Dartboard? column in the Wall Street Journal. Our
findings indicate that significant abnormal returns accrue to the
investors of pros picks, on the day of publication and on one day
after the publication. The results also indicate that there is no
significant stock price behavior pattern prior to the pros
recommendation. The holding period is arranged on a continuum ranging
from roughly one week to six months and a comparison of the mean
excess returns of the two portfolios is made over this range. Results
suggest that the pros selection statistically outperforms the random
selection only in the one-week period. Over a six-month holding
period, the random stocks perform better than the pros
recommendations. A publicity effect is discerned from the pros
recommendation, which gives support to a moral hazard problem
encountered by investment professionals. The results are also
consistent with the literature on noise and overreaction."
Journal Of Financial And Strategic Decisions,
Volume 8 Number 1 Spring 1995
Youguo Liang, Sanjay Ramchander and Jandhyala L. Sharma
The Performance of Stocks: Professional Versus Dartboard Picks
The contrarian viewpoint is expressed by Randall A. Heron, Glen A.
Larsen, Jr., and Bruce G. Resnick, of Indiana and Wake Forest
Universities, in "The Improper Use of Dartboard Portfolios as
Performance Benchmarks".
"In this paper we empirically study the improper use of dartboard
portfolios (i.e., randomly selected portfolios of stocks) as ?passive?
investment performance benchmarks for active financial decision-making
investment strategies. The problems associated with dartboard
benchmark portfolios arise because of systematic risk differences,
price pressures, and benchmarking errors. Simulations show that
dartboard portfolios are, in terms of risk-adjusted performance,
dominated by the broader market index fund constructed from the
universe of stocks from which the dartboard portfolios are selected.
The dartboard portfolios suffer from the lack of diversification due
to size and errors in security selection. The dominance of the index
fund persists even when we employ Markowitz optimization techniques to
identify ex ante efficiently diversified portfolios of the randomly
selected stocks."
The Improper Use of Dartboard Portfolios as Performance Benchmarks
http://www.financialdecisionsonline.org/current/heron.pdf
An off-the-cuff resource:
Money, Money, Money (and Investing) by Philip Greenspun
"Common Stocks and the Efficient Market Hypothesis
Suppose somehow that you collect a non-negligible amount of cash and
want to invest it. If you are investing for the long-haul, then common
stocks are your only reasonable choice since they offer the best
return. According to the Efficient Market Hypothesis, all stocks are
fairly valued because everyone on Wall Street has the same
information. So unless you have friends who will give you insider
information, there is no reason that you should buy Microsoft rather
than General Motors. Sure, Microsoft has a monopoly and GM doesn't,
but Microsoft's monopoly is already reflected in their lofty
price/earnings ratio and GM's perennial engineering and management
problems are already reflected in their absurdly low price/revenue
ratio.
If you buy into the Efficient Market Hypothesis then you're just as
happy to buy a portfolio of stocks selected by throwing darts at the
inside pages of the Wall Street Journal. In fact, the WSJ for many
years pitted expert wall street analysts against a dartboard portfolio
and the darts almost always did better. If you don't have very much
money, then a problem with a dartboard portfolio is that you will only
be able to buy a few stocks. Your expected return will still be 7
percent per year but the variance will be extremely high because one
company going bust could wipe out all of your gains."
Money, Money, Money
http://philip.greenspun.com/materialism/money
I hope you find the information useful. Feel free to ask for
clarification if anything is unclear/broken.
---larre
Answer Strategy | Search Terms
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"picking stocks" dartboard study
WSJ dartboard contest
"random walk" "wall street"
William Sharpe dartboard study
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Request for Answer Clarification by
nronronronro-ga
on
12 Sep 2004 15:19 PDT
larre---I appreciate your hard work. But your answer completely
missed the point of my question. Ordinarily, I would assume I had
failed to word my question correctly.
But in this case, I know my question is relatively clear because of
the comments previously posted by rabaga, hailstorm, neilzero, and
grammatoncleric.
As you can see from my question, this $60 query explicitly concerns
money management rules and *not* stock picking rules.
Randomized stock picking, dartboard contests, and the work of
Professor Sharpe clearly relate to stock picking rules. The studies
you cite do not concern money management rules (e.g., sell any stock
which declines 5% or more).
Indeed, of all the studies you cite, I don't believe any of them
contain a single money management rule. All your studies concern
stock picking, specifically randomized versus non-randomized stock
picking.
I'm not sure what to do. Your answer was terrific----but it didn't
answer my question, and it wasn't helpful to me.
Please write when you can.
ron
|
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3 Comments
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