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Risk and Return

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Skill or luck? That’s the question The Wall Street Journal’s Investment Dartboard

Contest sought to answer by pitting the stock-picking ability of professional analysts

against both amateurs and stocks chosen by throwing darts at tables of stock listings.

Here’s how the contest worked. The Wall Street Journal (WSJ) picked four pro-

fessional analysts, and each of those pros formed a portfolio by picking four stocks.

The stocks must be traded on the NYSE, AMEX, or Nasdaq; have a market capitaliza-

tion of at least $50 million and a stock price of at least $2; and have average daily

trades of at least $100,000. Amateurs could enter the contest by e-mailing their pick of

a single stock to the WSJ, which then picked four amateurs at random and combined

their choices to make a four-stock portfolio. Finally, a group of WSJ editors threw four

darts at the stock tables. At the beginning of the contest, the WSJ announced the pros’

picks, and at the end of six months, the paper announced the results. The top two pros

were invited back for another six months.

TheWSJactually had six separate contests running simultaneously, with a new

one beginning each month; since 1990 there have been 142 completed contests .The

pros have beaten the darts 87 times and lost 55 times .The pros also beat the Dow Jones

Industrial Average in 54 percent of the contests .However, the pros have an average six-

month portfolio return of 10.2 percent, much higher than the DJIA six-month average of

5.6 percent and the darts’ return of only 3.5 percent. In 30 six-month contests, the

readers lost an average of 4 percent, while the pros posted an average gain of 7.2

percent.

Do these results mean that skill is more important than luck when it comes to in-

vesting in stocks? Not necessarily, according to Burton Malkiel, an economics profes-

sor at Princeton and the author of the widely read book, A Random Walk Down Wall

Street. Since the dart-selected portfolios consist of randomly chosen stocks, they

should have betas that average close to 1.0, and hence be of average risk. However,

the pros have consistently picked high-beta stocks. Because we have enjoyed a bull

market during the last decade, one would expect high-beta stocks to outperform the

market. Therefore, according to Malkiel, the pros’ performance could be due to a ris-

ing market rather than superior analytical skills. The WSJended the contest in 2002,

so we won’t know for sure whether Malkiel was right or wrong.

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