Strategy, Chance and Malkiel’s Monkey

Why having a strategy — and the ability to stick to it — is more important than having the right strategy.

Believe it or not, the point of this blog post is not about investing. Or Monkeys for that matter. If you’re ok with that, please read on.

I spent the first five years of my career in quantitative finance writing algorithms to predict stock prices. Much of that time was spent reading other people’s research to find ideas to incorporate into my models. Most of these papers were technical and pretty dry but once in a while, I’d come across something that was refreshingly straightforward and concise.

One such paper was The Surprising Alpha From Malkiel’s Monkey and Upside-Down Strategies (Arnott et al, 2013). The title refers to a remark made by Princeton economics professor and Wealthfront CIO, Burton Malkiel, in his classic 1973 book A Random Walk Down Wall Street, that “a blindfolded monkey throwing darts at the stock listings could select a portfolio that would do just as well as one selected by the experts.” While at the time this was considered blasphemous in finance land, most investors now understand that stock picking is a fool’s errand. Instead, passively investing in index ETFs — and periodically rebalancing (this part will be important in a moment) — is the way to go.

Bring on the simians

There are many ways to allocate a passively managed portfolio, including equally weighting all of the positions, market-weighted (bigger companies get more dollars), growth-weighted (betting on momentum), and value-weighted (cheaper companies get a larger allocation), among many others. The wonderful point that Arnott, Hsu, Kalesnik, and Tindall make in their simiously-titled paper is that it doesn’t matter all that much which strategy you choose to weight the positions in the portfolio. What is important is that you:

  1. Have a principled allocation strategy

  2. Rebalance the portfolio once in a while

The authors use a simple but very clever technique to prove their point. First, they construct hypothetical portfolios using 11 widely studied (and invested) allocation strategies and run them through a simulated investing process. At the end of each year in the simulation, the portfolio weights are rebalanced to match the goal of the strategy (remember, this part is important.) And at the end of the simulation, the portfolio is graded on its risk and return characteristics. So far this is all fairly par for the course when it comes to finance papers.

But then these same 11 strategies are “inverted” to create 11 anti-portfolios. This has the effect of making the largest (smallest) position in each original portfolio become the smallest (largest) position in the respective anti-portfolio. For example, if you had a lot of money allocated to energy stocks in a given portfolio you’d have very little money in energy stocks in the inverted version. These anti-portfolios are then run through the same simulation process and their risk and return characteristics are graded.

The surprising result of all of this is that the anti-portfolios perform as well as, if not better than, the originals. It turns out that your investment strategy is much less important than your ability to stick to it. Without going into the details, this is because when you rebalance, you sell a portion of the positions that have appreciated and buy more of those that have declined in value. This buying low and selling high means that your portfolio will have a bias towards “cheaper” stocks, which decades of research and investment performance demonstrate is a reliable way to earn a higher rate of return than the market over the long run.

For fun (or was it academic rigor?) the authors also simulated a monkey throwing darts at a stock ticker-laden dartboard. The hypothetical primate managed to beat its benchmark by 1.6% per year.

In short, it doesn’t matter what your investment strategy is, only that you monitor your portfolio and consistently adjust it when it gets out of alignment with that strategy.¹

Your strategy is much less important than your ability to stick to it.

Start somewhere

As promised, this blog post is not about investing: It’s about strategy.

Whether in business, war, or one’s career, it is important to have a plan of action or policy designed to achieve a major or overall aim. There have of course been countless books written about the different strategies to use in each of these domains (no doubt some are even useful). However, in the vein of Dr. Arnott and his coauthors, my point is that in life the specific strategy you start with is not very important. I say this not because there are not “better” strategies out there but because I don’t think most of us suffer from having the wrong strategy per se; we don’t have a deliberate strategy at all.

I spent 18 months at Wharton getting my MBA and I met plenty of people who I would characterize as not having a deliberate strategy. On the one hand, there were hundreds of people scrambling to get prestigious jobs in banking or consulting, while hundreds more were fleeing those same jobs in search of something more rewarding. In this schizophrenic student body, I got to know many people who knew what they were running away from (long hours, a low-status company, the wrong title, not enough money) or even what they were running to (work-life balance, a brand-name firm, better job title, more money), but very often there didn’t appear to much reason for these decisions beyond default bias and herd mentality. If you think I’m wrong on this point, just ask any former MBA student what they wrote on their application essay and I’ll give you 10-to-1 odds that’s not what they’re currently doing.

We hit the two-year post-graduation mark last year and it seemed that the majority of my esteemed classmates had already found something new and different or were actively searching for it. I realized that if the people who have excelled academically, socially and professionally in the real world for a decade or more lacked deliberate strategies, the rest of us are unlikely to have it all figured out either.

Having a strategy is more important than having the right strategy

I’m confident these observations are not confined to the particular business school I attended. In his book, How Will You Measure Your Life, Harvard Business School professor Clay Christensen discusses a 1985 paper by business scholars Henry Mintzberg and James Waters, in which the authors distinguish between deliberate and emergent strategy. Deliberate strategy is that which an individual or organization sets out to accomplish having first determined their goals and the assumptions and facts they believe hold true. Emergent strategy is the decision-making process to follow new opportunities or to make changes to when problems present themselves.

In the book, Clay describes how many of his classmates and students at HBS set off with the best of intentions but over time lost perspective and let their actions drift further from their initial deliberate strategies. He even uses the framework to explain the outcomes of people like Jeffrey Skilling of Enron infamy. Put in terms of Malkiel’s monkey, these students were failing to periodically rebalance their portfolios thereby letting circumstance set their allocations — and priorities — for them. So, this concept of emergent strategy adds another bullet to our now-modified list from the previous section. We now have:

  1. Have a principled life strategy

  2. Periodically adjust behavior to align with the strategy

  3. When new information arises, adjust the strategy

Emergent strategy as Chance III

The concept of emergent strategy bears much resemblance to the idea of Type III Luck described in an essay by Marc Andreessen in which he cites the book Chase, Chance, and Creativity: The Lucky Art of Novelty by Dr. James Austin. The book (and Marc’s summary of it) describes four kinds of chance along a scale that goes from Chance I: “blind luck” to Chance IV: the kind of luck that one cultivates by being expert in a unique domain. Dr. Austin describes Chance III as “involv[ing] a special receptivity, discernment, and intuitive grasp of significance unique to one particular recipient.” I’d say this fits the description of emergent strategy quite well!

“Chance favors the prepared mind.” — Louis Pasteur

The example given by Dr. Austin and cited by Marc (which I’ll also do here) is that of Sir Alexander Fleming’s discovery of penicillin:

…The classic example of [Chance III] occured in 1928, when Sir Alexander Fleming’s mind instantly fused at least five elements into a conceptually unified nexus [when he discovered penicillin — one of the most important medical breakthroughs ever].

He was at his work bench in the laboratory, made an observation, and his mental sequences then went something like this: (a) I see that a mold has fallen by accident into my culture dish; (2) the staphylococcal colonies residing near it failed to grow; (3) therefore, the mold must have secreted something that killed the bacteria; (4) this reminds me of a similar experience I had once before; (5) maybe this new “something” from the mold could be used to kill staphylococci that cause human infections.

Actually, Fleming’s mind was exceptionally well prepared. Some nine years earlier, while suffering from a cold [you can’t make this stuff up], his own nasal drippings had found their way onto a culture dish. He noted that the bacteria around his mucous were killed, and astutely followed up the lead. His experiments then led him to discover… lysozyme… [which] proved inappropriate for medical use, but think of how receptive Fleming’s mind was to the penicillin mold when it later happened on the scene!

Framing the topic of strategy in terms of chance highlights the key difference between the investing analogy and its application to life: That while we can actually achieve excess returns in life if we are receptive to opportunity, the same cannot be demonstrated in public markets. Outside of a handful of investors, no one has demonstrated the ability to consistently earn excess returns, a finding corroborated by a mountain of academic research. However, the real world is full of inefficiencies that can be exploited and remedied by those with the right skills and the tenacity to seek them out and address them. Put concretely, rebalancing to the same strategy each year is enough to invest well over the long run, but succeeding in life requires one to incorporate new information and updates the strategy itself — in other words, requires meta-strategy.


The benefits of starting with something that works and iterating as new information presents itself is not a novel concept by any means, especially in Silicon Valley. However, an interdisciplinary approach to understanding important concepts can often help make them clearer and more applicable. Maybe the visual metaphor of a Monkey throwing darts will serve as a periodic reminder of the value of revisiting your strategies. Remember — as I constantly have to remind myself — that it’s better to start somewhere than not at all.

[1] The easiest way to actually do this is to take emotion out of the process and turn over the passive investing strategy to an automated investing service.