Monkey Throwing Darts

Who Needs Experts?

Monkey Throwing Darts

 

Here is the transcript of the "Who Needs Experts" segment of 20/20, from November, 1992. This is a popular video shown by proponents of passive investing. It stars John Stossel, Burton Malkiel, John Dorfman and others. 

HUGH DOWNS:  Good Evening. We hope you had a happy Thanksgiving. I'm Hugh Downs, I'm Barbara Walters and this is 20/20.

ANNOUNCER: Cashing in on the stock market can be easier than you think. Experts offer all kinds of advice. Did you ever meet a hotshot analyst, just like at what John Stossel discovered.

JOHN STOSSEL:  The odds are you would be better picking stocks this way; throwing darts at the stock table.

ANNOUNCER: It's true. And tonight, John proves it. Watch this report, and you might say, Who Needs Experts? Those stories tonight, November 27, 1992 after this brief message.

HUGH DOWNS:  For people who have never dabbled in it, the stock market can be very intimidating. So many companies to choose from, so much money to be made or lost. So if you want to try your luck, what is the soundest way to choose stocks? Many people, of course, turn to the most obvious sources of advice, the expert analysts, who work for stockbrokers or investment newsletters or mutual funds. But a while ago, John Stossel, discovered that some of the experts may be selling hot air. As he reported back then, you may do just as well with a good set of darts.

JOHN STOSSEL:  Want to make some money or just stay ahead of inflation? Most financial experts will tell you the single best investment you could make is putting your money in the stock market.

PROFESSOR BURTON MALKIEL, PRINCETON UNIVERSITY:  Historically, the stock market is like a gambling casino with the odds in your favor. Over the long pull, stocks are given something like nine and a half to ten percent compounded per year. The banks have probably given you something in the order of four to five. JOHN STOSSEL: And the ten percent beats inflation.

PROFESSOR MALKIEL: The ten percent beats inflation and beats it by a great deal.

JOHN STOSSEL:  So, if the stock market is such a good investment, then it's logical that we should listen carefully to those experts, the men and women, mostly men, actually, who make their living studying stocks and sharing their wisdom with us. You see them on news programs and financial advice shows.

STOCK BROKER 1:  Stick with Pepsico; it's a defensive type of stock with very good growth characteristics.

JOHN STOSSEL:  They really sound like they know what they’are talking about.

DENNIS KELLEY, JANNEY MONTGOMERY SCOTT:  I like Schering Plough, a stock that came from 65 down to 60, and Georgia Pacific, I had great success with that.

JOHN STOSSEL:  So it makes sense to go to these experts for advice.

PROFESSOR MALKIEL:  No, there it doesn’t.

JOHN STOSSEL:  Economist Burton Malkiel wrote, “A Random Walk Down Wall Street.” In the book, he says, yes, Wall Street analysts call and visit individual companies. They study the balance sheets, new products, marketing techniques, but this gives them no advantage he says, because what they learn is information all the analysts have. What they don'’t have is knowledge of the other factor that moves the market; news events. But since news is unpredictable, so is the market. Therefore, he says, the advice produced by Wall Street experts has little value.

PROFESSOR MALKIEL:  Most of this is just absolute non-sense. Most of it is really designed to get people to trade more than they should.

JOHN STOSSEL:  Trading is how the brokerage firms make their money. Every time they buy and sell stock, they charge you a commission. A big part of that commission goes to pay for the so-called expert analyst, who visit the companies, study all the numbers and works full-time coming up with this impressive sounding recommendation.

STOCK BROKER 2:  The cyclicals, the autos,…forget them. They won't perform and therefore any rallies I'd sell them if I still had them.

JOHN STOSSEL:  The big research departments help justify that image of wisdom the firms project in their commercials.

SHEARSON LEHMAN COMMERCIAL:  We're number one in investment research. Talk with us.

PRUDENTIAL COMMERCIAL:  So for peace of mind, investment advice, and your future on the Rock.

MERRILL LYNCH COMMERICAL:  At Merrill Lynch we know that risk can be dealt with. It can be managed.

JOHN STOSSELL:  Sounds impressive? But the surprising thing is that despite all of this complicated sounding research, despite these rooms filled with people in suits studying the numbers, the advice that comes out of most of these big brokerage firms is so consistently mediocre that odds are you would do better picking stocks this way, by throwing darts at the stock tables. It's hard to believe that this would be a better way to pick stocks. But the people who chart the brokerage firms recommendations say the numbers don't lie.

JOHN STOSSEL:  Over the years, the 500 stocks that make up the Standard and Poor's average had done just as well as the stocks that brokers suggested we buy.

JOHN STOSSEL:  Throwing darts: Oops, CBS. Oh, I also hit Munsing Wear. I've worn their underwear and Grumman, I ride their buses. This is known in the business as having a monkey throw darts at the stock tables and remarkable as it is, this method often does better than following the experts recommendations.

JOHN STOSSEL:  But the researcher really believes that he's right, doesn't he?

PROFESSOR MALKIEL: I believe they do and hopes brings eternal.

JOHN STOSSEL:  So all these experts are fooling themselves?

PROFESSOR MALKIEL:  It's like giving up a belief in Santa Claus. Even though you know Santa Claus doesn't exist, you kind of cling to that belief. I’m not saying that is a scam. They generally believe they can do it. The evidence is, however, that they can't.

JOHN STOSSEL:  Surprisingly, no one kept track of brokerage house recommendations until recently. Now it's all laid out in John Dorfman`s column in the Wall Street Journal. He started it five years ago.

JOHN DORFMAN:  It's been amazing me for decades. Brokers have been giving people advice and no one ever measured what would happen to you if you took it.

JOHN STOSSEL:  The journal paid Zack’s Investment Research of Chicago to gather all those impressive sounding recommendations from 10 of the biggest brokerage firms and then calculate how they did compared to the market as a whole. Or more precisely, the stocks that make up the Standard and Poor's 500. Most of the brokerage firm's results were embarrassing. For the year ending June 30th, the Standard and Poor's was up seven percent, but seven out of the ten big firms did worse than that. We also asked Zack’s to track 20/20's 20 stock dart throw.

BEN ZACKS:  And then we’ll measure the three months and 12 months performance and see how this compares to what the 20/20's portfolio did.

JOHN STOSSEL:  Over the one-year period, our stocks did pretty well. We were up 17 percent. That beat the expert recommendations from nine out of the 10 big brokerage firms. All that money the experts spend, visiting companies, studying the numbers, led to advice in this case was less useful than tossing darts.

JOHN STOSSEL:  So, are they stupid? Are they looking at the wrong things? Are they just spinning wheels?

JOHN DORFMAN:  Well, let's just say that, they make not be stupid, but they may not be any brighter than you.

JOHN STOSSEL:  The results over the years were different. Some years better, others worse, but most times since the Wall Street Journal started tracking the experts, the Standard and Poor's average did better than most of the famous firms.

JOHN STOSSEL:  We wanted to ask the brokerage firms about this. Why should anyone listen to their important sounding advice, given their poor track record? That's what we wanted to ask them, but not one of the big New York brokerage firms would agree to talk to us about this. I guess I could understand why.

JOHN STOSSEL:  We did talk to money manager, Robert Stovall, who used to run research departments EF Hutton and Dean Witter-Reynolds. He defended the experts.

ROBERT STOVALL:  One third of the money managers tend to beat the market every year.

JOHN STOSSEL:  Two thirds do worse.

ROBERT STOVALL:  Two thirds do worse, but it's different ones each time.

JOHN STOSSEL:  Why do these brokerage firms have these big research departments if they don't make money [for their clients]?

ROBERT STOVALL:  Everybody has a boss. Professionals won't buy Coca-Cola or some other stock unless they have reports in the file produced by well-known analysts. So if something goes wrong with the stock they buy and they show their boss, hey, I've got a big file on this stock. All these analysts say it was a good one. Something went wrong. That’s known as prudence.

JOHN STOSSEL: So even if the research is lousy, it protects them.

ROBERT STOVALL: That's right.

JOHN STOSSEL:  So, where does this leave you, should you have some money to invest?

PROFESSOR MALKIEL: And I think everyone should probably have at least some of their assets in the stock market.

PROFESSOR MALKIEL:  My philosophy is not to trade, not to listen to your broker who says sell this, buy that, but rather to buy-and-hold a diversified group of securities.

JOHN STOSSEL:  The most practical way to do that is to buy what is called an index fund. Some of these own as many as four thousand different stocks. So by buying them, it's like buying the entire market or if you like gambling, try the dart technique. You could hit some bad stocks and lose money, but remember, the odds are that if you dart, you'll do at least as well as most of America's biggest and richest brokerage firms.

BARBARA WALTERS:  Okay. So, how did the stocks do this year?

JOHN STOSSEL:  For the first three quarters of this year, the market as a whole is up about three percent. Our dart portfolio is up 20 percent.

BARBARA WALTERS:  That's very good. How did the brokers do?

JOHN STOSSEL:  The brokers have done well, as well. They, on average, are up 10 percent.

BARBARA WALTERS:  Not as good as the darts?

JOHN STOSSEL:  No, but they have been hot, and of the big firms, only two of them worse than average.

BARBARA WALTERS:  But there are some investment funds and newsletters and mutual funds?

JOHN STOSSEL:  Yeah, none of the experts are very expert. I didn't mean to single out the brokerage firms, but the mutual funds for example, the averages are up three percent. They lost money this year.

BARBARA WALTERS:  But John, I am always reading about people who done so terrifically well. You know, you look at the names and..

JOHN STOSSEL:  You read about them when they do well. That year, they’re hot. You don’t read about the other years.

BARBARA WALTERS:  So the moral of the story is to diversify?

JOHN STOSSEL:  Diversify, and hold on to it, don't trade.

BARBARA WALTERS:  Or learn how to play darts, :-).

 

UPDATE: December 17, 2010 video:


FBN's Sandra Smith and 'Random Walk Down Wall Street' author Burton Malkiel on how well-managed funds do compared with picking stocks randomly.