[dojomouse]

You don't need to wait until expiry to sell. There is a lot to be said for options if you use them carefully. Yes, risk is higher with high leverage and a narrow portfolio. But returns can be also. I think the line about risk adjusted returns being higher in index funds is 3 parts inexperienced investors trying to pick stocks without doing their homework and 7 parts experienced investors trying to convince inexperienced investors to provide mindless liquidity for them to work against. I prefer to make my own buy/sell decisions, and so far it's given me a FAR higher average return than any index fund.

[pyoung]

Without quantifying the risks involved with your trading strategies, it is impossible to say whether you are beating the risk-adjusted returns of an index fund. Additionally, I am pretty sure index funds, even without risk adjustments, have been proven to be better investments in the long term than any actively managed strategy. And this holds regardless of the experience of the investors. There are always going to be a few exceptions to the rule, but most of the people getting rich in wall street are doing so because they are taking a cut of other peoples money (management fees), not because they are genius investors.

Also, with actively managed strategies, it only takes one or two bad bets to wipe out years of gains, and due to natural biases, individual investors tend to under-report/weight losses and over-report/weight the gains. As such, we always tend to hear how other investors are making a killing on a certain stock or trade, but we rarely hear from the losers, which distorts our perceptions of risk and returns (so far, I have seen a handful of people talk about their Tesla stock holdings on this thread, but I have yet to see a single person talk about haw bad they are getting cleaned out because they shorted the stock).

[btilly]

There are always going to be a few exceptions to the rule...

Back when I lived in NY and worked in bond markets, an interesting study came out evaluating active mutual fund managers. A chance distribution was able to account for all but 2 at a 95% confidence level. Those two exceptions were named Peter Lynch and Warren Buffett.

Peter Lynch unfortunately retired from active investing, and his advice is that people should invest in indexed mutual funds. He also is not unexplainable by chance - the chance of someone having done that well by chance was under 5%, but it was still possible.

At a 99% confidence level, only Warren Buffett was left.

Warren Buffett is unquestionably knowledgeable. But his returns have been boosted over the long term by a couple of major investing advantages. The first is that he likes to buy whole companies, and is reportedly a stellar manager. His management expertise then turns into improved returns for that company, which becomes a good investment. Thus the cause/effect relationship is not clear. The second advantage is that when a company has problems (eg Goldman Sachs in 2008) they tend to call Warren, because they know that if they get him on board then they will restore confidence. But the deal that he gets is significantly better than what anyone else can get from that company.

The study did not include hedge funds like the one George Soros ran because their complex trading strategies can't readily be compared.

Anyways, the professionals can't run funds which beat chance returns. Why do you think will be able to?

(Technical detail. It is possible to beat the averages, and my understanding is that the professionals do on average tend to do so. The problem is that their cost of beating the average is sufficiently high that their funds don't come out ahead. And the results of their research get reflected in the stock price, which is available for everyone to look at.)

[eru]

Warren Buffett has another advantage: He realized the value of financing his investments with insurance floats earlier than the rest of the world did.

[btilly]

And another. His performance was measured over a very long time period, including a period where the market was likely much less competitive than it is now.

[rdl]

Well, it was also around earnings, so I wanted to wait for earnings (which turned out good) and the pop from that.