A chimpanzee with a typewriter, given sufficient time, could eventually produce a Shakespearean sonnet. But trade in the typewriter for an online brokerage account and what will that chimp produce? Probably not market-beating results, to judge by the probabilities implied in the narrowness of the equity exchanges.
The cumulative advance-decline lines in their charts show remarkably different pictures for the listed vs. the over-the-counter markets. The "breadth" of the
market essentially hasn't been positive since 1990. The
, in contrast, enjoyed a broad-based rally from 1995 through 1997, but has had persistently negative breadth since. You don't want a chimpanzee, even a talented one, picking stocks in these markets.
The disastrous breadth picture for the over-the-counter market offers no clue that the total return performance of the Nasdaq blew away that of the NYSE during the '90s. Despite the fact that breadth never got its nose above water, the Nasdaq Comp has returned 24% annually since January 1990 against the NYSE's 13%, for a cumulative gap of nearly 600%.
If our chimp had pawed through 4,600 Nasdaq names to settle on the largest 100, his performance would have jumped to 33% annually. And if, to focus his attention on sonnets, he had happened to settle on a single security portfolio of
shares, his numbers would have been 93% annually, or 85,000% cumulatively. Maybe it's a lot to expect that a chimp might have identified Cisco 10 years ago, but is it any less likely than him turning out a Shakespearean sonnet?
The disastrous breadth of the OTC market reveals that the winners, spectacular as their performance has been, had to drag a lot of baggage to enable that exchange-level 24% annual return to be posted.
Looking back at the '90s and the success of indexation as an investment strategy, these breadth charts demonstrate that you had to read a lot of ljoiiu qelk nfoiuoe aposdjpm to get to that brilliant bit of chimpanzee Shakespeare. But the record shows that indexation worked remarkably well in producing gaudy total return performance, despite the odds against implied by the predominance, in terms of numbers, of losers over winners.
Looking forward, you have to wonder whether the chimp will get it right again in the current decade. In the yeasty turbulence of the mini-cap strata of today's markets, there lurk future giants -- but there are almost surely many more companies that are destined to fail. What are the chances that the future winners will be so powerful as to lift index-level performance against the dead weight of so many losers? What are the chances that the investment outcomes of the decade ahead will mimic the narrowly based power of index-level returns that the '90s turned in?
It seems likely to me that a) index-level performance will not match the record of the '90s, and b) that value-added against the index by seasoned managers -- of both growth and value persuasions -- will occur much more persistently than it did in the decade just past.
The MBA and CFA may count for something once again. Just don't ask them to write sonnets.
Jim Griffin is the chief strategist at Hartford, Conn.-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at