[dninednjwryv]

People absolutely beat the market over time. The investment world when they say no one beats the market, are referring to investment managers moving billions of dollars. As a regular guy, you can. It’s sad to see this terrible advice repeated ad nauseam

[alecst]

Doesn't the investment world say something like "no one can beat the market forever?"

Of course some people can win sometimes. But to do it consistently is a different story. You have to have some kind of edge: being faster (unlikely), smarter (unlikely), or access to information other people don't have (also unlikely).

Or do you really think the average guy can do better than the market, and why or how?

[dninednjwryv]

No. Stop it with this mentality. When managing a small portfolio, < 5 million dollars, you can be very agile in how you invest. Small hedge funds in NYC with less than 10 million under management regularly make 50-100% a year. It’s not a controversial opinion. It’s just that the financial industry has pushed this narrative as a way to sell index fund products. Completely diversifying your investments is a terrible way to make money. Warren buffet himself says this all the time. Source is I used to work in finance in NYC

[alecst]

I'm intrigued.

1. How is a regular guy going to achieve the same results as a hedge fund with a 10 million dollar portfolio?

2. Regarding Buffett's quote, do you mean "diversification is protection against ignorance?" I think his point is that if you have special knowledge you can take a concentrated position in a stock, but that for the regular guy, diversification is a hedge. Since most stocks underperform and most gains are from a small fraction of stocks, his quote seems to make sense.

[DeathArrow]

>How is a regular guy going to achieve the same results as a hedge fund with a 10 million dollar portfolio?

Maybe by finding a well managed small fund and buying into it?

[throw0101a]

> Maybe by finding a well managed small fund and buying into it?

Just because a fund manager is good now, does not mean they'll be good in the future. It's the same situation as with stocks: how do you know when to jump ship?

Further, over longer periods of time, most fund managers don't beat the market average:

* https://www.ifa.com/articles/despite_brief_reprieve_2018_spi...

And just because a few funds do manage to beat the average, it's hard to tell that they are ahead of time. Over the last 40-50 years (in the US) there have been some that have had excellent results—for a while. Until they didn't ("Chasing Top Fund Managers"):

* https://www.youtube.com/watch?v=p6HrepdLSu4 (18m34s)

* https://rationalreminder.ca/podcast/136 (topic starts at ~15m)

Plenty of peer-reviewed papers at the bottom of that second (podcast) link.

[throw0101a]

> When managing a small portfolio, < 5 million dollars, you can be very agile in how you invest.

Most stocks suck:

> We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251

> Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

What are the odds that you manage to pick those few stocks that produce those returns? How much effort does a person have to put in to find these stocks? How much time to do that that is not spent (a) working a full-time job, (b) spending time with friends and family, (c) perhaps having a non-investing hobby? And do that over decades to build (e.g.) their retirement fund, and then another few decades (again) to protect their retirement nest egg.

Perhaps someone can beat the market, but what is the trade-off versus accepting "only" market returns by investing in a total market fund?

[dninednjwryv]

Dude I’m too busy to argue with you, I literally used to regularly interact with people making these returns. Yes it’s hard and it’s a full time job. But it happens all the time, academic research is worthless. Accepting index returns basically means keeping up with inflation, and “getting rich” at 70 years old. If that’s what your aim is in life then sure, go for it

[throw0101a]

> Dude I’m too busy to argue with you, I literally used to regularly interact with people making these returns.

I don't doubt that many people have managed to accomplish good returns. But you have to do it for the ~30 years to build a nest egg for (e.g.) retirement, and then another 20-30 years post-retirement to preserve said nest egg.

But there's a huge problem:

> Instead, I am going to argue that you shouldn’t pick stocks because of the existential dilemma of doing so. The existential dilemma is simple—how do you know if you are good at picking individual stocks? In most domains, the amount of time it takes to judge whether someone has skill in that domain is relatively short.

> For example, any competent basketball coach could tell you whether someone was skilled at shooting within the course of 10 minutes. Yes, it’s possible to get lucky and make a bunch of shots early on, but eventually they will trend toward their actual shooting percentage. The same is true in a technical field like computer programming. Within a short period of time, a good programmer would be able to tell if someone doesn’t know what they are talking about. […]

> But, what about stock picking? How long would it take to determine if someone is a good stock picker?

> An hour? A week? A year?

> Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years.

[…]

> Just imagine how nerve-racking this must be when [temporary underperformance] finally happens. Yes, you had skill in the past, but what about now? Is your underperformance a normal lull that even the best investors experience, or have you lost your touch? Of course, losing your touch in any endeavor isn’t easy, but it’s so much harder when you don’t know if you have lost it.

* https://ofdollarsanddata.com/why-you-shouldnt-pick-individua...

If people think they'll be able to meet their goals picking stocks successfully for several decades, they are free to try. But in my estimation the odds are not on their side. I prefer to play the odds. ¯\_(ツ)_/¯

> Accepting index returns basically means keeping up with inflation […]

Inflation has been <3% over the last ten years in the US. The S&P 500 (for one) has returned much more than that on an annual basis. Even with the 'Lost Decade' of the S&P 500 in the 2000s, simply having 20% bonds (and perhaps rebalancing) would have been sufficient to overcome inflation.

[dninednjwryv]

Since when was investing the simple act of vanilla stock picking? And I don’t care what the government reports as inflation. Your problem is you don’t actually understand investing from a professional and practical point of view, it’s very different behind closed doors in the real world.

[6gvONxR4sf7o]

I also thought that it was more that nobody offering active management beats the market after their fees are taken into account.

[devoutsalsa]

People who beat the market are lucky.

[Silhouette]

I know more than one person who has been "lucky" in that way remarkably consistently for decades. At some point you start to ask if they are making their own luck.

These are all people who have no-nonsense investing strategies. They don't do anything weird or controversial. They typically look for value and fundamentals and they make their biggest gains simply by buying or selling at a good time by recognising something important before the market.

An example I always remember one of them giving me was a company that made building materials. During an exceptionally wet summer a lot of building work stopped because sites were washed out. Stocks in the big homebuilders had fallen heavily and this smaller supplier had tracked them down. However it fell so far that its price-to-book ratio was less than 1. (Roughly speaking that means the cost to buy a share is less than what that share would be worth if you could distribute the current value of the tangible business assets to the shareholders.) My friend invested and after the bad weather passed, trade returned to normal levels, the stock price corrected, and they had made a very good return over a few months.

[mettamage]

No, the fact is: there is too little objective data to know about either side in the retail sense.

And the objective data that is there says that 1% of day traders out perform the market in the shanghai stock exchange (I could misremember).

The point is we have too little data to know almost anything.

I am on my phone no time for source finding.

[throw0101a]

> And the objective data that is there says that 1% of day traders out perform the market in the shanghai stock exchange (I could misremember).

What are the odds that you are of those 1%? (Hint: you're probably not in that group.)

Given that I have >20 years until retirement, what are the odds that I will be in that 1% for all of that time?

Further most stocks suck:

> We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251

> Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447

What are the odds that you manage to pick those few stocks that produce those returns?

[DeathArrow]

>What are the odds that you manage to pick those few stocks that produce those returns?

Aren't most of those stocks the best performers of each industry? Can you fail by buying FAANG?

[devoutsalsa]

Stocks don't go magically go up all the time. When earnings slow down, the stock stops being seen as a growth stock, and the share price stays flat or goes down. Generally speaking anyway.

[throw0101a]

Investing in technology can bite you if you invest at the wrong time:

* https://www.pwlcapital.com/investing-technological-revolutio...

* https://en.wikipedia.org/wiki/Technological_Revolutions_and_...

AMZN dropped 90% after the Dot Com Bubble burst. TSLA in the last five years:

> In the past 5 years, there were drawdowns of 30%, 50%, -60% and -35%. This stock was down 60% in 2020! It’s up a cool 1000%+ since then.

> And the crazy thing is there were plenty of Tesla shareholders who did hold on for the entire ride. They were true believers in the face of relentless negativity about the company and its founder.

> Kudos to them.

* https://awealthofcommonsense.com/2021/10/the-10-most-dangero...

Do you have the mental fortitude to hang on during those times? How do you know when you're wrong?

> The first has to do with stock picking. Mr. Housel points out that most public companies are duds, a few do well, and a handful become extraordinary winners that drive the vast majority of the stock market’s returns. He cites data from the Russell 3000 Index that shows, since 1980, forty percent of all Russell 3000 stock components lost at least 70% of their value and never recovered.

* https://boomerandecho.com/weekend-reading-the-psychology-of-...

* Housel's book: https://www.goodreads.com/en/book/show/41881472-the-psycholo...

* https://awealthofcommonsense.com/2014/09/stocks-dont-come-ba...

FAANG may be great stocks—right now. But there are plenty of stocks that used to be great as well:

> Exxon Mobil replaced by a software stock after 92 years in the Dow is a ‘sign of the times’

* https://www.cnbc.com/2020/08/25/exxon-mobil-replaced-by-a-so...

When do you know when a stock you've pick that used to be good stops being good? IBM, AT&T, and GM were in the Top 10 of companies on the S&P 500 for decades: how are they doing now? How do you know when to jump ship?

* https://www.dimensional.com/us-en/insights/large-and-in-char...

AAPL didn't do very well in the 1990s: when would have dropped them? When should you have picked them up? (After the (in)famous Microsoft investment perhaps?)

Further, just because investing in a company on its way up may be give you good returns, does that still apply once it is at the top?

> But as massive as these behemoths became, that has not necessarily made them good long-term investments. For each decade starting 1930, 1940, 1950, and so on through 2010, the 10 largest companies at the start of the decade have made up, on average, 23.6% of the U.S. stock market. But, in the decade that followed, the average annual return of those 10 largest companies has trailed the market by an annualized 1.51% on average.

* https://www.pwlcapital.com/are-the-largest-large-cap-growth-...

Investing in the "top companies" was a fad in the past—and returns weren't necessary that good over the long-term:

* https://en.wikipedia.org/wiki/Nifty_Fifty

Owning the best stocks is hard:

* https://awealthofcommonsense.com/2021/03/owning-the-best-sto...

[mettamage]

Edit: I am a bit sad that I got downvoted. What's wrong with a contrarian opinion? I'm not suggesting we should all pick stocks. I'm saying there's not enough data to know conclusively that one couldn't outperform the market.

> What are the odds that you are of those 1%? (Hint: you're probably not in that group.)

Again, this was research on day trading (for which I didn't supply the source, sorry for that). It was not about buying and holding with at least for a 5 year horizon. That's what I meant with we have too little data. Day trading is not investing.

> What are the odds that you manage to pick those few stocks that produce those returns?

As I've learned with poker: only play on tables where you see fish. Which translates to: only play games that you are sure that you can win. The hard part is to not enter any games that you're not fully sure about of winning. And yes, there are not many games that you can win at all. But when you see one, you go at it aggressive and win. It's easier to say than to do it (based on my poker experience).

I'm not saying that people can beat the market. But I still believe even after all this that it's hard to say that people aren't beating the market. We need data of actual accounts over long time horizons. IMO that's the only way that question can be answered. Unfortunately, that's unrealistic since it's a feature that the stock market is anonymous and private to other market participants.

I feel there's a feedback loop going on where everyone echoes each other that you can't beat the market. And I feel that echo is stronger than the actual evidence. Don't get me wrong, the evidence that I see is quite compelling. But it isn't foolproof and it has many gaps. It's about as compelling as the efficient market hypothesis. Yes, in general markets are efficient, but why does it take 5 to 15 minutes for information to be incorporated into a stable price? That means if you'd trade at minute 2, you're almost guaranteed to make money [2]. I don't have sources for this, but these are my observations. This is even more true in the crypto markets where academics are saying that markets aren't fully efficient.

The only thing I can say with regards to the whole "you can't outperform the market" rhetoric is this: if you want to invest safely, then don't try to outperform the market. There is enough research that it's a dangerous endeavour. So is starting a startup (from a financial standpoint). However, that doesn't mean it's impossible to outperform the market, or create a great financially successful startup for that matter.

[1] According to Graham, he mentions it in his book The Intelligent Investor.

[2] Every time when I look at day price information and see a news event priced in, I notice it takes at least 5 minutes in many cases. It's never instant.