Michael Reeves Just Ruined Investing

Hey guys, so we gotta have a serious talk.

Just recently, Michael Reeves made a complete mockery of the entire finance community by using a stock-picking goldfish to beat the market, and it worked! Somehow, the guy who builds beer-peeing robots was able to construct an algorithm that correctly predicts the perfect stocks before they go up in price. To give you an idea of just how impressive that is, his goldfish beat mom-and-pop investors, Wall Street Bets, and hedge funds combined.

Though even though it might seem like Michael Reeves has just discovered a hidden money printer that sends Warren Buffett quivering in fear, not so fast! Because I'm here today to set the record straight and expose not only how this goldfish experiment was rigged but also why his algorithm is not as good as he thinks it is. Plus, if you watch until the very end, I'll show you how you could replicate this exact same money-printing strategy even if you don't have a fish tank.

And Michael, if you're watching this, I'm looking forward to settling this in the boxing ring on May 14th. Even though I'll be throwing a lot of jabs throughout this video, for all of you watching, it would help me out tremendously if you jabbed that like button for the YouTube algorithm, because it does help me out a lot. So thank you guys so much! And also, big thank you to public.com for sponsoring this video, but more on that later.

All right, so to bring you up to speed with the so-called experiment, Michael built the rather complicated algorithm that tracks his goldfish's movement across the tank. From there, every morning, two random stocks appear, and his goldfish, Frederick, will pick the stock he wants to buy, depending on which side of the tank he stays on. Easy, right?

Well, in order to find out whether or not Frederick actually does well, these stock picks are benchmarked across one of the most renowned and respected investing communities in the entire world: Wall Street Bets. This is a place where degenerate gamblers, I mean investors, share tips, tricks, and strategies for printing attendees, buying Lamborghinis, and going to the moon.

So, Michael Reeves built an algorithm that analyzes the top stocks of each day, tracks them, and then we can see who does better: a community of 10 million people strong or a goldfish? As you can see, throughout the experiment, the goldfish purchased 23 stocks, including Costco, Pfizer, Chevron, and Facebook. Not bad, right? Wall Street Bets bought GameStop, AMC, Blackberry, Clover Health, and a multitude of the most talked-about companies on the interwebs.

So which one did better? Well, before I tell you, you really have to understand what's going on because, as easy as he makes it look, the entire setup is rather genius. First, it's important to mention that overall, animals actually make really, really good stock pickers. For example, there is a blindfolded dart-throwing monkey who beat professional stock-picking experts 40% of the time throughout 14 years.

We also have an octopus who not only correctly predicted the World Cup championship but also outperformed the brightest minds of Goldman Sachs, or this other goldfish who outperformed the market by an average of fourteen and a half percent over three years. We also have a cat who beat the market by eight percent, a monkey named Adam who beat Jim Cramer, a chimpanzee who beat 94% of Russian bankers, and even a crypto trading hamster who beat Warren Buffett.

It's not just random luck either, because so many animals have proven to beat the market time and time again that a year ago, I created my own experiment where I personally invested a hundred thousand dollars in 10 randomly picked stocks by the YouTube monkey Boo. And guess what? To my surprise, at the end of the year, the YouTube monkey generated a 41% return and beat the entire S&P 500 by 13%.

So even though Michael Reeves' algorithm, I mean goldfish, seems really, really impressive—just like a magic trick—it's all an illusion. As it turns out, there's a very simple reason why all of these animal portfolios do so incredibly well.

See, when people pick stocks, they do so by trying to profit from inefficiencies in the market. That just means they pick stocks that should, in theory, be worth more in the future based on their growth, fundamentals, projected earnings, seasonality, and trends. So if professionals have all of these resources available at their disposal to pick the next big opportunities, why can't they do it consistently better than an animal?

Well, that's what brings us to what's called the Efficient Market Hypothesis. This argues that the stock market makes no room for excess profits, because everything is already fairly and accurately priced in. In other words, stocks cannot be undervalued because their current price already includes their future growth value and earnings. The only way to make more money is by choosing riskier investments where the upside is directly proportional to the chance that you will lose money.

Now, of course, there are investors like Peter Lynch or Warren Buffett who have outperformed the market over multiple decades. But others argue that out of your probability, at any given point in a market, with enough people, some will outperform the mean. Otherwise, a winning strategy would only work until enough people figure it out, at which point it would no longer be effective because everyone else is doing it.

But in the animals' case, the reason they perform so well is because it's kind of rigged. In fact, you could replace the animal with just about anything, even a snail, and it's going to do well. Just consider this research conducted in 2013, which found that by randomly selecting 30 stocks out of a list of a thousand companies and buying them all in equal proportion, you're increasing the likelihood that that portfolio would contain smaller stocks which have more potential for higher growth.

As proof of this, between 1980 and 2015, smaller stocks returned over 11% on average, while large stocks only returned 8%. So that just means when animal stocks are picked at random while investing an equal amount in each, you're more likely to include smaller companies which have a higher return than the overall index, and voila! He beat the market.

But now what about Michael's situation? Because after all, he bought into the S&P 500, where every single company is worth over 5 billion dollars. So did Michael just get really lucky, or is there any truth to this? But before we answer that, when public.com heard that I was making this video, they wanted to be a part of it and give you a free stock worth all the way up to a thousand dollars just for signing up using the link in the description with the code "grant."

There are no commissions on standard stock trades, no account minimums to get started, and they don't route your order flow like some other investment apps do. Plus, what makes Public different is the optional community experience that they bring to investors. You could share ideas with other members and get insights from notable investors. You could read my thoughts on the market, and you could do all of that from your phone or desktop with a new enhanced trading feature that allows for customized ways to track and analyze your positions over time.

The link is down below in the description where you can sign up with the good gram. Thanks so much! Now, with that said, let's get back to the video.

Well, well, well, here's where things start getting really good. When you buy into something like an S&P 500 index, your investment is weighted by the market cap of each company, meaning the bigger the market cap, the more of your money goes to that particular investment. In this case, if you invested a hundred dollars into something like SPY, seven dollars would go into Apple, 5.9 to Microsoft, 3.75 to Amazon, and that continues until the smallest company only gets 0.014 of your money.

However, in Michael's case, he's buying an equal proportion to every single company his goldfish picks. That increases his chances of picking a smaller company that will see a higher return, beating Wall Street Bets, and then making a video on YouTube to flaunt the fact that he beat the brightest hedge fund managers in the world with a fish.

This same experiment was also simulated a thousand times back in 2013 with another goldfish, and as you can see from the S&P 500 in black, the goldfish beat that return 96.4% of the time over a three-year period by an average of over 14 percent. However, at this point, you probably gotta ask yourself: if doing this is so effective and it makes so much money, why isn't everyone doing it?

Well, the reason is simple: risk. Even though smaller companies outperformed by 1.7% 96% of the time, they also experienced significantly more volatility. Meaning just as much as they went up, they also went down. Like if we compare the top 1,000 growth companies with the top 2,000 value companies, we could see that nearly every price movement to the value category is magnified by at least 20 to 50%.

Risk is something that every investor needs to consider when they think to themselves how much money do I want to risk versus how much do I want to make? For most investors, choosing the short-term volatility of investing in completely random stocks usually does not beat the safety of investing in 500 different companies throughout an index and earning slightly less. My own monkey portfolio is a perfect example of this.

Like I mentioned, throughout 2021, 10 randomly picked stocks outperformed the S&P 500 by a full 13%. But in 2022, when I repeated this experiment again, the monkey portfolio lost 9% during a time when the S&P 500 was only down three and a half percent. Does that mean the experiment is flawed, or I just got unlucky? No! When the market goes up, the monkey is statistically likely to do even better, but when the market goes down, the monkey is going to lose even worse. It's a balance of risk and reward, and this year the monkey is losing.

That's why as interesting as this experiment is, and as fun as it is to research and watch, when you account for both stability and risk, the best investment still tends to be investing it all in a broad index fund and then doing absolutely nothing. The buying of index fund strategy has even outperformed hedge funds and the best actively managed funds in the world by a rate of nearly double, showing you that over the long run, no one has any clue what's going to happen, including myself.

So, Michael, it's a great experiment, and your goldfish proves that stock picking tends to be an over-complicated mess of financial advisors trying to one-up each other. But doing that is also directly proportional to the level of risk that you take. So if you want to settle this, we could settle it on May 14th at the Creator Clash event.