The result indicates that the “random walk hypothesis”, popularised in economist Burton Malkiel‘s book A Random Walk Down Wall Street, is perhaps truer than we thought. Burkiel’s book explores the idea that share prices move completely at random, making stock markets entirely unpredictable.
The Guardian article omits — or, does not discuss the implications of — two significant facts:
1. The competing investor groups (professional fund managers; students; Orlando) each had 5000 pounds to invest on five stocks. That’s not a lot of money to allocate to each stock if done equally across the portfolio. It means that if the stocks are held for a year, they had to rise by a large percentage for the investor group to make any money. This limits the successful stocks to long only strategies and break-out trends — in what is often a range-bound and volatile market.
2. The competing investor groups could only “turnover” the stocks once every three months. The professional fund managers didn’t change their stock allocation in the third quarter, whereas the students did, and profited. This means that the professional fund managers appear to have adopted a long only or buy and hold strategy for the year, and perhaps without hedging global macro or market events. The rate of “turnover” means that more actively traded strategies such as tactical asset allocation were not tested, nor was the impact of transaction and execution costs in shorter time-scales.
The design and rules — let alone the portfolio selection and market timing decisions by the competing investor groups — appear to have affected the experiment’s outcome. The study design does not allow for the comparative testing of portfolio selection and market timing decisions that active fund managers use, and that highlight behavioural finance and market microstructure limitations on the Efficient Market Hypothesis.