Question

Barron’s recently reported results of a study showing that if one picked stocks at random, the performance of that strategy generally beat the performance of the S&P 500. Is this result surprising? Explain.

Answer 1

Before knowing and discussing about what a non-strategy/picking stocks at random does to the existing portfolio, let's know what does a strategy based stock picking would benefit us.

With the technology embedded, we have many methodologies to arrive at best stocks to buy with the help of R programming, momentum simulation, and monte carlo simulation etc. Choosing based on value, growth and fundamentals of the company with particular time horizon and investment risk return also comes under one of the strategy considered by the investors.

Now, coming to the random picking of a stock, this can attribute the diversification to one's portfolio. But also contributes to lot of uncertainty .Future is unpredictable and the stock may not happen to appeal by it's high risk or high beta/volatility. Maybe saves research time and stress although this doesn't guarantee that it can pull down the other stock's gains in one's portfolio, hence this non-strategy picking may not surprise an investor as much as he may expects.

But this has been surprisingly been a hit to one of the  top hedge fund manager David Harding, who advises that one should take an equal weights of randomly picked stock in the portfolio and this has actually given 99.99% results beating the S&P 500 performance. Although this may not be the conventional strategy that's used by many.