[ct4ul4u]

I worked on Wall Street starting in the mid 80s and with and on trading desks since the mid 90s. I've built the technology for equity trading desks and program trading desks. I was the business manager for a couple of program trading desks. I've created trading products (most notably a dark pool that mixed retail and institutional order flow).

I am a big believer that individual investors can't beat CAPM and shouldn't be picking stocks. I think the ideal portfolio is a mix of treasuries, equity and debt index funds, and angel investments.

[rjett]

"I am a big believer that individual investors can't beat CAPM and shouldn't be picking stocks."

First of all, hasn't CAPM been shown to be a nice, but not terribly accurate, picture of how the market works? Among other things, it assumes that asset returns are normally distributed random variables, it assumes that investors have homogeneous expectations about the return of an asset (aka everyone has the same info at the same time and observes the same risk and expected return of any particular asset), and it doesn't explain variance in stock returns. In other words, it doesn't accurately mirror reality.

Secondly, while I agree that most people shouldn't be picking stocks, my hair still bristles when I hear someone say that individual investors can't beat the market. True, little retail investors are probably at a disadvantage to the bigger, faster funds out there, but this hasn't stopped a handful of people from beating the market. <brag>I've averaged 28% annual returns over the past 12 years. Maybe you would say I'm just lucky though? </brag>

[wisty]

Well, by definition, half the investors (by portfolio size) beat the market, and the other half fail. And everybody assumes that they are in the top 50%, which is unlikely since the winners stay and losers cash out.

So most investors can't beat the market. I guess you could also look at the risks - betting a small amount (and finding out if you have the chops) could be a reasonable bet. Leaving large sums in the hands of someone else (as opposed to say an index fund) ... less good.

[ct4ul4u]

I didn't say that CAPM precisely modeled the market. I said that individual investors can't beat CAPM, meaning they can't beat the reward/risk relationship predicted by the model.

The model predicts that you can get higher returns by accepting greater variance on those returns. Even at moderate risk levels, it's easy to predict that some investors will happen to get the kind of returns you describe. Were your returns a result of your agency? Who can say.

Let's sidestep the issue of luck. I don't believe it is likely that your prior returns are a meaningful indicator of your future returns. But I could be wrong.

For a given asset, (Jensen's) Alpha is usually quite small compared to total return. How do you isolate the Alpha you identify?

[Sukotto]

  <brag>I've averaged 28% annual returns over the past 12 years.

Factoring in your transaction costs, how does your investing strat compare to buying and holding a large index like VFINX over the same time period?

Telling us your returns means nothing without a way to compare to the market as a whole.

[sandipc]

http://www.google.com/finance?chdnp=1&chdd=1&chds=1&...

and

http://www.google.com/finance?chdnp=1&chdd=1&chds=1&...;

[rjett]

What I quoted is after transaction costs. If I go off from Jan 1, 1998 when the S&P was 975.04 to Dec 31, 2009 when it was 1115.0, that means it has averaged 1.12% compounded annually.

[eru]

Oh, that's not so much.

[joshu]

Did working on Wall St give you the experience you needed to become one of the Great Old Ones?

[thunk]

It might be the other way around.

[ct4ul4u]

You both have too much faith in time and causality.