Ever wonder how your cat affords to eat so well, why he’s got better healthcare than you do, and why he can jet off to all those fancy destinations while you buckle down for another stay-cation? The answer, my friend, is that your cat handles his money better than you do.
No, seriously. Gawker writes today about the results of an experiment by The Observer in Britain which pitted stock market pros, students, and a cat against one another in a stock-picking contest:
Per the rules of the challenge, each group of participants — three professionals, a class of students from a secondary school in Hertfordshire, and a ginger cat named Orlando — were allowed to invest Ł5,000 in any five companies on the FTSE All-Share index.
The cat’s selections were made by it pushing a toy over a grid of numbers associated with various companies.
All told, the cat made a cool Ł542 in profit; the professionals, a paltry Ł176.
The students did even worse.
If you previously suspected you’d be able to beat your cat in such an exercise I’m afraid you really should reconsider your investment strategy. The stock market is famously difficult to predict, and while there’s some debate over whether institutional investors utilizing high technology can in fact beat the market – Nate Silver’s book has a good discussion on this – one thing we do know is that the average individual is a lousy investor. As a famous 2000 academic paper put it, “Trading is hazardous to your wealth.”
But since many BostInno readers are startup fans, it’s worth pointing out that there’s at least a real chance that you’d be a better angel investor than your cat. Whereas in lots of areas of finance, there’s little to no evidence of “persistence” – a measurement of skill that checks whether one year’s top performers are likely to remain at the top in subsequent years – the same is not true of venture capital.
While there is no evidence of persistence for top performers in mutual funds, and very little evidence for hedge funds, there is strong evidence of persistence in venture capital. The best VC’s are the best year to year, providing some evidence that skill (or some other non-random factor) plays a significant role.
But before you go bragging to your cat about your angel investing, keep in mind it’s still only the best of the best who consistently beat public markets in the VC game. So you might want to ask your cat for some investment advice after all.