Wall Street vs Chimps

A friend sent me an interesting article debunking the widely-promulgated myth that traders are especially gifted creatures. Simply, other businesses make much more efficient returns on shareholder equity. Of the top ten DJIA stocks ranked by return-on-equity, only one — American Express — is in the sector of financial services:

But actually, the rabbit hole goes a little deeper.

From the Daily Mail:

They are paid a fortune for their ability to make complex decisions about where to invest millions of pounds every single day.

But perhaps the job of an investment banker is not quite as difficult as it might seem.

A chimpanzee in Russia has out-performed 94 per cent of the country’s investment funds with her portfolio growing by three times in the last year.

Moscow TV reported how circus chimp Lusha chose eight companies from a possible 30 to invest her one million roubles – around £21,000.

I think this brings us to a (rather obvious) hidden truth.

Human beings are generally very good — vastly better than any chimpanzee — at creating value, producing things, bringing ideas to life. That’s why the most efficient companies on the DJIA — even over long periods — are all industrials.

Human beings are generally very bad — no better than any random stochastic process, like a chimpanzee throwing darts — at predicting the future in non-linear domains like currency rates and stock prices.

The fact that our predictive industries keep requiring taxpayer bailouts seems to confirm this.

24 thoughts on “Wall Street vs Chimps

  1. Where zerohedge has become a refuge for overly-pessimistic and drama-seeking end-of-worlders, I appreciate this blog for its insights and good posts. Thanks.

    • Zerohedge is the only Blog that takes a week to get your account set up. Must be run by the Government to find Neo1776- Rebels.

      I mean what Blog takes a week to set up! Bureacrats Pfft!

      • Tyler and I have had some interesting E-Mail discussions. I think their policy is mainly a way of blocking spam. You should see the amount of spam even this very small blog gets.

  2. For most of recorded history society viewed money changers as a parasite upon society. Even in western culture until about 500 years ago usury was viewed as immoral. Today somehow they are seen as the wizards of smart — and essential to the economy — when they provide no real substantive product or service.

    I’m interested to know how Boeing gets such an amazing return? My gut tells me it has something to do with government contracts.

    • The problem is Fundamentalist Christians only read the Old and New Testament, and stick to literal interpretation (The Priests read between the lines), but Rabbinical law (Torah, and offshoots) is dynamic and interpretive and the notion of usury as bad has changed from one of enslaving the borrower to one of helping the borrower & compensating the lender for not having access to other opportunities.

      When you understand this, you’ll see why Jewish people have high positions in Finance. Unfortunately they are now being unfairly targeted as scapegoats, because of a few rogues (Madoff).

  3. Personally I prefer spider monkeys, they seem to be more in tune to Nadaq type stocks.

    And now you know why Buffet is a Oligarch. His philosophy of buying companies that have strong brands and global reach works. The ROE is out of the ordinary.

    And Bank of America, well when you have the following he does, and the resources to buy distressed assets, who can’t make money.

    Off topic, but something that I think may release the animal spirits in the USA: I see posts on other bloggs that flipping of real estate has returned, and big profits are being made. If you have access to capital you can buy a run down shack, spend a few thousand renovating (using pool of eager skilled labour!). ZIRP = Good Times Baby!

    • Yeah, he has bought a lot of really productive and dynamic stocks. There’s no doubt Berkshire Hathaway and other such assorted companies have created a lot of value. But all of that has been in the context of the great American free lunch of 1971-2008.

      Bank of America has a lot of dynamite on its balance sheet. We know Buffett’s purchasing power has dropped precipitously in the last decade. I think that the chances are it will drop further in the next ten.

  4. I think Taleb added something like “independent trader” to his list of honest professions. And this is how he made his fortune if I’m not mistaken. The problem is with the 20-something year old kids playing with other people’s money.

    • Canciu,

      I never did understand why a hard working, honest man or women would give their hard earned money (You need $500,000 to walk into most major finacial advising firms), to a 25 year-old.

      Really, when I interned at Merrill in 2001, everyone was still touting internet stocks. Gold, China or housing, never heard a beep in 3 months.

      PS They’re still running the show. Run, don’t walk.

      • I’m 24 — and I’d say I am reasonably knowledgable about finance — and I think anyone who would give me their money for me to manage would be very foolish. The whole idea that we should delegate out money management to someone who “knows better” (often, a 21 year old stripper-molesting cokehead) is quite dangerous. People who want to be investors should learn about financial markets for themselves and do their own damn due diligence.

        • hahah Stripper Molesting Cokeheads. You are British!

          I always wanted to be a stockbroker after watching Wall St as a 16 year old. Finally when I got my chance to meet with the owner of a large Melbourne broking firm, I was asked if I had to call up all my friends, family and contacts, how much money could I bring in. I said I don’t think I can help you. He said “son, we earn our money by people buying stocks not selling them. We need our corporates to raise equity so the owners can cash out. Thanks for your honesty”

          The moral of the story is any financial advice is just the same as beauty advice from a Department Store Girl.

          The only way I think small players can win, is to band together in groups than use weight of collective money to target stocks. This tricks the bigger players and Robots into buying in. In Fight Club Investment Club so to speak. Hell we could even have fun with it by using funny rituals, astrology, moon phases, planetary alignments to feel like we are some type of “Eyes Wide Shut” Investing Club.

        • Growing up in New York I’ve known several pit traders (mostly commodity traders). I know firsthand that calling them “Stripper Molesting Cokeheads.” is an incredibly accurate description.

  5. @ Buddy

    “but Rabbinical law (Torah, and offshoots) is dynamic and interpretive and the notion of usury as bad has changed from one of enslaving the borrower to one of helping the borrower & compensating the lender for not having access to other opportunities.”

    It is good that it is interpretive and dynamic but going against fundamental basics of the law is a no no. The truth is it was by-passed because the Rabbis wanted to get rich and enslave the borrowers.

    Lending money and charging interest is risk free….there is no opportunity cost involved so they do not need compensating, otherwise their money would be idle capital. Today because money is digital and paper it is not even created through labour anymore, it is simple conjured up from thin air. There is a reason for banning usury….by virtually all ethical systems of the pre-modern world, including by Plato and his teachers…it leads to the creation of a parasitic ‘all powerful’ elite.

  6. On the stock market…the whole law proscribed way of defining ownership (joint stock) and control of a comapny allows for corruption and manipulation to occur. A minority share holder is considered a owner (on paper de juro), but de facto they have no power or control over the company….the real owners and controllers the majority share holders decide the direction of the company. In other words they are controlling the shares of millions of minority owners and benefitting from it. Real ownership means they have control…so a individual who owns one share should have as much control as someone who owns 100 shares. If this cannot be done then do not sell shares in the company…this is another example of a corruption of the ethical divine law causing general harm to human society.

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