[kspaans]

Good point about trading versus investing. When index investing advocates say that it's hard to beat the market over the long term, I've always wondered what the difference is with traders. Do their returns beat the S&P500? Does an individual who trades forex as their day job do better than stuffing their money in an index fund for 40 years? Lately I've learned that larger traders can provide value apart from buy&hold, e.g. market making, finding the right price for something, shorting bubbles.

[mjwhansen]

I don't have specific numbers on traders, but I do know that 80% of mutual funds underperform their benchmarks. One reason (of many) is that they're under pressure to provide numbers every quarter, or to seem like they're reacting when something short-term happens, so they sell out of positions that would have been more profitable had they held onto them.

Index funds are a great solution for investors who want to invest passively and get the market return (which averages 10% a year over the long term -- might be -20% and +30% year-over-year, though).

The thing with shorting bubbles is extremely difficult to get right, and "finding the right price" doesn't necessarily mean you're making a good decision. Amazon was trading around $300 a share earlier this year -- which many trader types saw as outrageous -- but it has doubled this year alone.

I suppose, in general, I follow the Black Swan approach: humans are terrible at predicting the future. Absolutely awful at it. But I'll take a "bet" on -- by which I mean, buy part of -- a company with great management/people and solid financials (i.e., no debt, positive revenue growth, FCF positive).