[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.