Why I Don’t Try And Beat The Market

I want to talk about the ability to beat the market and how unlikely it is… and, more importantly, how liberating it will be to appreciate and embrace this fact.

Trying to beat the market is a fools errand.

Believe me speaking from someone who used to run a hedge fund.

It’s not easy to beat the markets, also called having an edge.

But when considering your edge: Who is it exactly that you have an edge over, other investors in the market?

This happens obviously.

But instead of a faceless mass, think about who they actually are. What knowledge they had and what analysis they undertake.

In an earlier post I introduced Susan the manager of a tech investment fund trading Microsoft shares.

As explained, Susan has the best set up and circumstances imaginable to trade Microsoft, but not only that…

Susan also spends a ton of time thinking about what other things she can utilize to gain further advantage over us, and the markets, when trading the stock.

And if she comes up with other ways to get ahead she will be incredibly well resourced to secure her advantage, whatever it might be.

She can spend more time and money on new angles, algorithms than any reasonably resourced other investor.

And trying to keep up is a near impossible rat race.

So good thing you have an edge, or advantage, over Susan… and the thousands of her equally well resourced and informed peers trading Microsoft.

And that you can predict share price movements better than them do… I don’t think so somehow!

You might be brilliant, arrogant and naive.

You might be the next Warren Buffett, you just might be.

But if you aren’t, then you can’t beat the markets. It’s just a fact.

And obviously most people can’t.

Most people are far better off accepting that.

The market price reflects the stock’s true value incorporated in future positive return expectations for the stock.

But also a risk that things don’t go to plan.

Far far too many people think they can beat the markets and far too few people actually can.

People working in banks, insurance funds, brokerage firms, media outlets etc. get paid in many direct and indirect ways in the financial markets.

So if we reasonably conclude that we can’t compete with Susan’s insights and knowledge, why don’t we just give our money to an investment fund and have them create portfolios for us?

Now regular investment fund charges a very great deal of money. You can roughly assume that they will expect 2 percent a year in fees and expenses.

So if someone manages $100 for you, at all costs of doing this will be approximately be two dollars a year come rain or sunshine.

And markets are steaming ahead and are up 20 percent, so the 2% is no big deal, right?

But in reality– over the long run we can perhaps expect equity markets to be up an average of 4.5 percent above inflation a year.

So you need to pick an investment fund that would outperform the markets by over 1.5 percent per year, before your costs in order to be no worse off.

And if you had picked an index tracking investment with fees and expenses of perhaps 0.5 percent.

But of course not all the investment funds like Susan’s performed the same.

If a thousand firms try to beat the same index, like the S&P 500, then perhaps one out of 10 will actually do so.

The one in 10 are terrible odds and further evidence then unless you have a magician, a psychic or expert coin flipper on your side…

Then better than hiring an investment firm you are better buying an index fund tracker, like an ETF by vanguard or similar.