Why you'll never be rich

[DespotInExile]

I read a lot of posts from 2p2ers on this forum trying to "beat the market." Some people try for stock picking, while others agonize of making sector rotation calls or macro trades. Some think that reading Peter Lynch's One Up on Wall Street is the solution, while others swear by Joel Greenblatt's Little Book that Beats the Market.

There is a cottage industry of people out there who get rich by convincing people of above average intelligence that they can beat the market. They peddle books, newsletters, brokerage advice, active management, technical analysis software, and other magic bullets to you. (Interestingly, I'm told by a friend currently in GA, that many people in his meeting are intelligent, white collar professionals who got caught up with day trading.)

If you try to beat the market--odds are, you will fail. All of the academic research proves this time and time again. A very small minority of you (or money managers with whom you will place money) may be able to beat the market, but the problem is that you can almost never identify these people in advance of their historical performance, so you can give them your money to invest.

At the same time, I feel somewhat hypocritical at making this pronouncement, because my own wife makes her (very good) living by trying to beat the market, and we all know of people out there--Warren Buffet, Stevie Cohen, and others--who frankly have demonstrated the ability to beat the market.

But it's a bad idea to try it yourself. The more I have looked into it, the more I believe that trying to beat the market leads to excessive trading, and subpar returns. Your goal should not be to beat the market. Arguably, your goal shouldn't even be to match the market.

Your goal should be to seek low alpha, low beta returns, over a long period of time, and let compound interest do the rest for you. Base hits, not homeruns. Work a day job, live frugally, minimize your taxes, and make conservative, well diversified, regularly re-balanced, passive investments.

This is the most surefire way of getting rich. Most other strategies dont get you there.

[dopp16]

Excellent Post-

I am a financial advisor and most clients that have reached out to me have done so because of their inability to time the market or find "hot stocks"...a stigma that people actually believe.

[latefordinner]

If you pick 50 stocks from the S&P 500 at absolute random what's the O/U on having beat the index of 500 one year out?

[Hank Scorpio]

What you're essentially saying is that you're a believer in a strongly efficient market. I'm not, so I feel the market can be beat. What you said in your post hasn't been said over and over again before.

[dopp16]

[ QUOTE ]
What you're essentially saying is that you're a believer in a strongly efficient market. I'm not, so I feel the market can be beat. What you said in your post hasn't been said over and over again before.

[/ QUOTE ]

Do I think people can beat the market? Absolutely....Do I think the market is efficient? Yes....is it absolutely efficient? No. That is why there are insider trading laws, and more compliance issues in this industry than any other. With that said, can a full-time career person ever have he time to devlop an efficient stock-picking strategy? Absolutely not. The market has returned ~10.5 % in the last 20 years. My grandfather is a former investment banker, CFA, and market analyst. Has a BA in economics from Princeton and is a 40 Year day trader. He boasts a personal portfolio return of ~11%. Are the edges that exploitable?

[latefordinner]

why would your grandfather spend 40 years day trading if he could have gotten almost exactly the same returns with absolutely zero effort and used all that time to make other money?

[DespotInExile]

[ QUOTE ]
What you're essentially saying is that you're a believer in a strongly efficient market. I'm not, so I feel the market can be beat. What you said in your post hasn't been said over and over again before.

[/ QUOTE ]

It's not just an articulation of the strong efficient market hypothesis. It is also the notion that reading the time-delayed news, public filings, investment banking research, and applying Graham & Dodd doesn't work, because other "quasi public" information--unavailable to you but traded on in the market by sophisticated players--is where the alpha comes from. There's a ton of information in the market that the general investing public doesnt and can't get access to. For example, statements made by management at conferences; off-the-record conversations made by management despite the existence of Reg-FD; "flow" information from sell side traders; information from service providers like lawyers and financial advisors who will never speak with you; industry-specific information from companies like Gerson Lehrman consultants; quantitative tools that allow analysts to backtest different variables in order to set up hedges to isolate the risks they want to take on, or create pair trades; access to sell-side researchers to have qualitative conversations about issues, information, etc. not necessarily compiled in published research reports; the ability to hire outside service professionals to help advise you on indentures, bankruptcy events, litigation risk, etc. that could bear on valuation; etc. etc.

If you tell me that you're a former research analyst, investment banker, CFA, MBA, corporate lawyer, finance academic, deep industry expert, or whatnot--fine, you might have a chance at beating the market if you work very very hard. If, on the other hand, you tell me that you're just a smart guy who got a 1520 on his SATs, went to Princeton, worked at McKinsey drawing charts, and now work at Procter & Gamble as a product line manager setting the brand strategy for small-bag potato chip distribution in academic institutions--I'll tell that you're best off trying to avoid picking winning stocks/bonds, because your smarts arent enough and you dont have access to the right information to beat the WSJ. Being able to read a financial statement, and the Wall Street Journal does not make a stock picker.

[jumbojacks]

lol, I'm still very much a beginner and still have much to learn but it seems pretty obvious that it is possible to beat the market with enough work. It might be very tough with a full time job, but I think the matter really comes down to how much capital you have to work with. A lot of this "can't be the market" generalization sounds a lot like "nobody wins in poker because we all lose to the rake." Just because there aren't many winners doesn't mean that it's near impossible.

[DesertCat]

[ QUOTE ]
[ QUOTE ]
What you're essentially saying is that you're a believer in a strongly efficient market. I'm not, so I feel the market can be beat. What you said in your post hasn't been said over and over again before.

[/ QUOTE ]

It's not just an articulation of the strong efficient market hypothesis. It is also the notion that reading the time-delayed news, public filings, investment banking research, and applying Graham & Dodd doesn't work, because other "quasi public" information--unavailable to you but traded on in the market by sophisticated players--is where the alpha comes from. There's a ton of information in the market that the general investing public doesnt and can't get access to. For example, statements made by management at conferences; off-the-record conversations made by management despite the existence of Reg-FD; "flow" information from sell side traders; information from service providers like lawyers and financial advisors who will never speak with you; industry-specific information from companies like Gerson Lehrman consultants; quantitative tools that allow analysts to backtest different variables in order to set up hedges to isolate the risks they want to take on, or create pair trades; access to sell-side researchers to have qualitative conversations about issues, information, etc. not necessarily compiled in published research reports; the ability to hire outside service professionals to help advise you on indentures, bankruptcy events, litigation risk, etc. that could bear on valuation; etc. etc.


[/ QUOTE ]

Warren Buffett doesn't use any of this stuff. He could have access to it if he cared, but he moved back to Omaha so he could ignore people on Wall Street.

[ QUOTE ]

If you tell me that you're a former research analyst, investment banker, CFA, MBA, corporate lawyer, finance academic, deep industry expert, or whatnot--fine, you might have a chance at beating the market if you work very very hard. If, on the other hand, you tell me that you're just a smart guy who got a 1520 on his SATs, went to Princeton, worked at McKinsey drawing charts, and now work at Procter & Gamble as a product line manager setting the brand strategy for small-bag potato chip distribution in academic institutions--I'll tell that you're best off trying to avoid picking winning stocks/bonds, because your smarts arent enough and you dont have access to the right information to beat the WSJ. Being able to read a financial statement, and the Wall Street Journal does not make a stock picker.

[/ QUOTE ]

Buffett has said you don't have to be super smart to beat the market, you have to be reasonably intelligent (120ish IQ) and have the right emotional qualities that allow you to be patient, and not get carried away by the market's swings. He has said you don't need to know much more than basic mathematics, either. His recommendation would be to learn how to read a financial statement, and read many of them along with the wall street journal, and a couple of other good papers every day.

I'm pretty sure Monish Parabai's has averaged around a 25% return, and is one of the young guys described as the next Warren Buffett. I think he takes a nap in the middle of the work day, he describes himself as a man of leisure who doesn't work too hard.

[Mr. Now]

The irony is that a very small minority of highly disciplined traders help make markets more efficient by systematically identifying and exploiting quantifyable edges.

This means EMT and anti-EMT camps are both right.