Why is it hard to beat the market?

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cal91
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Why is it hard to beat the market?

Post by cal91 »

I mean, I am only invested in index funds so I clearly am convinced that it's not worth trying to beat the market.

But why is it that way... why is it so hard to beat the market?

To me, it makes sense that one could find companies that have good business models and leadership and are more likely to outperform the market. So why is it not this way?
WildBill
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Re: Why is it hard to beat the market?

Post by WildBill »

Howdy

Lots and lots of very smart and hard working people with more time and better information than you agree with your argument and they are all trying very hard to beat the market.

Their efforts cancel each other out.

Good luck

W B
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simplextableau
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Re: Why is it hard to beat the market?

Post by simplextableau »

It's not hard - wrong question. If you pick individual stocks, there's a pretty good chance you'll beat the market. However, there's also a pretty good chance you'll underperform the market.

The real problem is you won't know which of these outcomes is yours until you're 30 years in, and if you underperformed, well you've just screwed your retirement. The risk averse investor settles for the respectable market average and sleeps well at night.
H-Town
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Re: Why is it hard to beat the market?

Post by H-Town »

From the books I read and comments from this forum, there are many funds out there that can beat the market for a short period of time. There are very few that can beat the market over a long stretch of time. And after you account for the high fees of those funds, you're left with market return - more or less.

The kick is - can you pick out the fund out of thousands of funds out there that can perform admirably over a long stretch of time (30-50 years while you're saving for your retirement)?

The easy way is to accept the market return, continue to save and rebalance. Then, you'll have all the time and effort that can be used for your career and your life. :beer
jbolden1517
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Re: Why is it hard to beat the market?

Post by jbolden1517 »

cal91 wrote:I mean, I am only invested in index funds so I clearly am convinced that it's not worth trying to beat the market.
But why is it that way... why is it so hard to beat the market?
To me, it makes sense that one could find companies that have good business models and leadership and are more likely to outperform the market. So why is it not this way?
To beat the market you have to
  1. Do something different
  2. Be right
If you are the sort of person who often can think against the crowd and see what others don't (be honest with yourself here) then you stand a chance. The next question is do you have the sort of internal honesty to address your own mistakes. The stock market is not nearly as harsh as poker in terms of ruthlessly addressing your personality flaws but it is in the same league.
Jack FFR1846
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Re: Why is it hard to beat the market?

Post by Jack FFR1846 »

cal91 wrote: To me, it makes sense that one could find companies that have good business models and leadership and are more likely to outperform the market. So why is it not this way?
You have to find these companies before ANYONE else does. Then after you buy and everyone else also finds and buys them, driving the price up, you have to know when they're no longer underpriced and get out.

I don't know how to do either of these things.
Bogle: Smart Beta is stupid
IlliniDave
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Re: Why is it hard to beat the market?

Post by IlliniDave »

This was discussed in another thread recently but I don't remember which. Most of the gains in a market come from a small minority of the companies. Unless you cast a very wide net it is unlikely you'll get a good sampling of those companies. And the wider your net the more you will converge on market results.

There are a lot of people out there working virtually around the clock to identify those companies, so as an individual you have to outsmart the smart money. Not impossible, but extremely difficult to do systematically over time.
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alex_686
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Re: Why is it hard to beat the market?

Post by alex_686 »

It is like asking why every talented high school basketball players doesn't make it to the NBA.

I believe in the "Semi" flavor of the Efficient Market Hypothesis. The "Pure" version states you can't beat the market. The "Semi" ones says you can. Of course you are competing against 1,000s of other rational market participants. Some are professional investors who do research or use computerized models. They run hedge funds, mutual funds, pension funds, etc. Employees and other stake holders who have a ground view of what is happening. Lots of individuals too, some talented. Together they make up a "Wisdom of the Crowds".
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
anil686
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Re: Why is it hard to beat the market?

Post by anil686 »

IlliniDave wrote:This was discussed in another thread recently but I don't remember which. Most of the gains in a market come from a small minority of the companies. Unless you cast a very wide net it is unlikely you'll get a good sampling of those companies. And the wider your net the more you will converge on market results.

There are a lot of people out there working virtually around the clock to identify those companies, so as an individual you have to outsmart the smart money. Not impossible, but extremely difficult to do systematically over time.

I think this is the answer I think about a lot with this question because it really does encapsulate the difficulty. Even in the SP500 - admittedly many known and well respected companies - a small minority of them will account for the entire indexes gain over a period of time - but - almost capriciously - the winners change without notice. So while the indexes return are by a minority of companies - these minority of companies change over time making it very difficult to cast your bet and then continue to bet right year over year, decade over decade. JMO though...
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Watty
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Re: Why is it hard to beat the market?

Post by Watty »

Part of what makes it hard not only do you have to be right about buying superior stocks but you also need to be right about when you sell them too. There are people that have done well with stock like Telsa and Apple but they still have not sold their stock so it is too soon to say that they beat the averages.

You also have to be realistic about just how much you might be able to beat the market by. A mutual fund manager would be in the investing hall of fame if they could beat a comparable index fund by 1% a year over the long term. They also do stock picking as their full time job and have staff to help them. Thinking that you might be the market by a significant percent when you only spend a few hours a week on it it wishful thinking.

There is also a risk that you might somehow get good results for ten years then have a very bad year that would more than wipe out your investing record.
Last edited by Watty on Tue Aug 01, 2017 3:40 pm, edited 1 time in total.
staythecourse
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Re: Why is it hard to beat the market?

Post by staythecourse »

Everyone has a different POV, but mine is all based on if one believes the markets are efficient enough or not. If one does believe in market efficiency then all the information known is already known by all the players in the field and is thus reflected in the current price. So that means the ONLY ways to know MORE then anyone else is either through 1. Inside information or 2. Speculation. That is it. If it is no. 1 then it is illegal and your all star manager eventually ends up in Jail or no. 2 it is just guessing in which case when does the lucky guessing end up wrong.

I believe there was a story in one of the esteemed authors on this forum that told of a story of true inside information. Rothschild used to have pigeons sent out and when a battle was won they used to put the messages on the pigeon on who won and flew back to him. So, he had several days advantage of acting on that information before anyone else did. That is the power of inside information. Now with high frequency trading any knowledge that may be known in advance is arbitraged away within milliseconds. Not so easy anymore.

In the end, as I have said numerous times the question is not can you beat the market. The answer is yes. Otherwise, no one would even do it. No one tries to run across a busy highway for a reason. NO one has ever survived. If a few did then you would see more folks try. The real question a retail investor has to ask is: Can you actively beat the market over even 1/2 of a person's investing time horizon (25 years) post fees, post taxes, and post inflation with a high probability vs. just doing the default option of index, passive investing? IF the answer is yes then one should consider it, but if not then best to just go the passive route.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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bottlecap
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Re: Why is it hard to beat the market?

Post by bottlecap »

cal91 wrote:I mean, I am only invested in index funds so I clearly am convinced that it's not worth trying to beat the market.

But why is it that way... why is it so hard to beat the market?

To me, it makes sense that one could find companies that have good business models and leadership and are more likely to outperform the market. So why is it not this way?
Because the future is unknown.

A company may have a good business model and leadership, but is still just as likely to be subjected to random market forces, changing consumer desires, or upstart competitors. Companies can also have the right ideas at the wrong time.

If these "good" companies were really good enough to predict the future, then none of them would go out of business, be sold, or relinquish their market share.

And if the businesses themselves can't tell what might happen and react appropriately every time, how is an investor on the outside going to do that with even less information?

Business ain't easy out there.

JT
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Phineas J. Whoopee
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Re: Why is it hard to beat the market?

Post by Phineas J. Whoopee »

alex_686 wrote:It is like asking why every talented high school basketball players doesn't make it to the NBA.

I believe in the "Semi" flavor of the Efficient Market Hypothesis. The "Pure" version states you can't beat the market. The "Semi" ones says you can. Of course you are competing against 1,000s of other rational market participants. Some are professional investors who do research or use computerized models. They run hedge funds, mutual funds, pension funds, etc. Employees and other stake holders who have a ground view of what is happening. Lots of individuals too, some talented. Together they make up a "Wisdom of the Crowds".
None of the forms of the Efficient Market Hypothesis: Weak; Semi-Strong; nor Strong says that. I wrote about what it does say in this post.

One doesn't have to accept the EMH, but at the very least one should know what it says.

PJW
Last edited by Phineas J. Whoopee on Tue Aug 01, 2017 4:16 pm, edited 1 time in total.
avalpert
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Re: Why is it hard to beat the market?

Post by avalpert »

cal91 wrote:I mean, I am only invested in index funds so I clearly am convinced that it's not worth trying to beat the market.

But why is it that way... why is it so hard to beat the market?

To me, it makes sense that one could find companies that have good business models and leadership and are more likely to outperform the market. So why is it not this way?
If it were easy everybody in the market would be doing it and the market price would adjust to reflect that everybody could easily do it and then you would have to be able to beat all the people who did it easily and that will be hard...

Seriously, if one can find companies that have good prospects why would you think that many in the market wouldn't find the same thing and set the price for those companies appropriately?
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Re: Why is it hard to beat the market?

Post by avalpert »

simplextableau wrote:It's not hard - wrong question. If you pick individual stocks, there's a pretty good chance you'll beat the market. However, there's also a pretty good chance you'll underperform the market.

The real problem is you won't know which of these outcomes is yours until you're 30 years in, and if you underperformed, well you've just screwed your retirement. The risk averse investor settles for the respectable market average and sleeps well at night.
You are going to have to define 'pretty good chance' more precisely...
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Phineas J. Whoopee
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Re: Why is it hard to beat the market?

Post by Phineas J. Whoopee »

staythecourse wrote:Everyone has a different POV, but mine is all based on if one believes the markets are efficient enough or not. If one does believe in market efficiency then all the information known is already known by all the players in the field and is thus reflected in the current price. So that means the ONLY ways to know MORE then anyone else is either through 1. Inside information or 2. Speculation. That is it. If it is no. 1 then it is illegal and your all star manager eventually ends up in Jail or no. 2 it is just guessing in which case when does the lucky guessing end up wrong.
...
One's belief does not change whether market participants, most of whom disagree with each other over prices most of the time, when they place their limit orders take information into account or not, nor whether they agree with you personally regarding the implications of the information.

If I may be forgiven for linking to my own post twice in this thread, I wrote about it here.

PJW
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Phineas J. Whoopee
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Re: Why is it hard to beat the market?

Post by Phineas J. Whoopee »

cal91 wrote:I mean, I am only invested in index funds so I clearly am convinced that it's not worth trying to beat the market.

But why is it that way... why is it so hard to beat the market?

To me, it makes sense that one could find companies that have good business models and leadership and are more likely to outperform the market. So why is it not this way?
In aggregate, the participants in the market are the market, and therefore own the capitalization-weighted market. For every invested dollar that earns more than market return, there must be another that garners less. As posted upthread by several others, to beat the market you have to be both different and, in hindsight, right.

Looking at past performance is easy. Foretelling future performance, in a market where most of the participants know at least as much as you do, and many find out sooner, is hard.

PJW
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flamesabers
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Re: Why is it hard to beat the market?

Post by flamesabers »

cal91 wrote:But why is it that way... why is it so hard to beat the market?
It's hard to beat the market because it's a complex system filled with uncertainty. There is practically an infinite number of variables that can make or break a company or a sector of the economy.
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Phineas J. Whoopee
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Re: Why is it hard to beat the market?

Post by Phineas J. Whoopee »

avalpert wrote:
simplextableau wrote:It's not hard - wrong question. If you pick individual stocks, there's a pretty good chance you'll beat the market. However, there's also a pretty good chance you'll underperform the market.

The real problem is you won't know which of these outcomes is yours until you're 30 years in, and if you underperformed, well you've just screwed your retirement. The risk averse investor settles for the respectable market average and sleeps well at night.
You are going to have to define 'pretty good chance' more precisely...
If one deviates from a market portfolio it is all but certain one's long-term returns will differ from its.
PJW
deltaneutral83
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Re: Why is it hard to beat the market?

Post by deltaneutral83 »

It's a zero sum game, when you (or a manager) buy, someone (or some manager) is selling, and vice versa. Wen you only buy 5 stocks, that doesn't qualify as that is total speculation with so few equities. If you do purchase 20-40 stocks and have a decently diversified portfolio the people you buy from and the people you are selling to have infinitely more time and resources to research and they eat, sleep, and breathe this stuff (while charging their clients 1% AUM plus loads and other fees but that's not the point). It looks like the benchmarks outperform active mgt. usually 88-94% of the time net of fees. It's kind of like being assured the purse of a second place finish at the Kentucky Derby every single year on average without the time and money used to try for first year over year. Second place pays nicely over a lifetime.

By the way, you won't hear retail stock pickers posting on various internet forums about their -6% CAGR vs the corresponding benchmarks being up 8% CAGR over a fifteen year stretch. For some reason, all you see are gains. Go figure :D .
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arcticpineapplecorp.
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Re: Why is it hard to beat the market?

Post by arcticpineapplecorp. »

Have you read William Sharpe's (the creator of the Sharpe Ratio) short paper, "The Arithmetic of Active Management"? It's very short and easy to understand. Read it here:

https://web.stanford.edu/~wfsharpe/art/ ... active.htm

the best bits are :
"Any graduate of the ___ Business School should be able to beat an index fund over the course of a market cycle."

Statements such as these are made with alarming frequency by investment professionals. In some cases, subtle and sophisticated reasoning may be involved. More often (alas), the conclusions can only be justified by assuming that the laws of arithmetic have been suspended for the convenience of those who choose to pursue careers as active managers.

If "active" and "passive" management styles are defined in sensible ways, it must be the case that

(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and

(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar

These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.

Of course, certain definitions of the key terms are necessary. First a market must be selected -- the stocks in the S&P 500, for example, or a set of "small" stocks. Then each investor who holds securities from the market must be classified as either active or passive.
followed by this:
Over any specified time period, the market return will be a weighted average of the returns on the securities within the market, using beginning market values as weights. Each passive manager will obtain precisely the market return, before costs4. From this, it follows (as the night from the day) that the return on the average actively managed dollar must equal the market return. Why? Because the market return must equal a weighted average of the returns on the passive and active segments of the market. If the first two returns are the same, the third must be also.

This proves assertion number 1. Note that only simple principles of arithmetic were used in the process. To be sure, we have seriously belabored the obvious, but the ubiquity of statements such as those quoted earlier suggests that such labor is not in vain.

To prove assertion number 2, we need only rely on the fact that the costs of actively managing a given number of dollars will exceed those of passive management. Active managers must pay for more research and must pay more for trading. Security analysis (e.g. the graduates of prestigious business schools) must eat, and so must brokers, traders, specialists and other market-makers.

Because active and passive returns are equal before cost, and because active managers bear greater costs, it follows that the after-cost return from active management must be lower than that from passive management.

This proves assertion number 2. Once again, the proof is embarrassingly simple and uses only the most rudimentary notions of simple arithmetic.
Also, why is it hard to beat the market? Well, if it was easy then everyone would be beating the market! :oops:
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: Why is it hard to beat the market?

Post by chinto »

A different take on it.

It is very hard to beat the market because the environment businesses operate in has become vastly more complicated over the last 30 years. You know have international competition. relative enormous regulatory compliance costs, litigation worries, and government micromanaging the environment of the employees in the organization. Additionally the upper echelon of bruins are now thoroughly insulated from shareholder dissatisfaction. Most corporate boards are set up now only like mutual admiration societies, but cooperative mutual benefit societies. Ergo C level executive pay has lost the link between the value add of the individual and compensation levels. For an example take a look at Tobacco companies, the Government is trying to eradicate them. But also look at restaurants. The new regulatory compliance cost is enormous. I know a plethora of BK franchises and Taco Bell franchisees who stopped their expansion plans simply because of Obamacare. They did not want to hit the 50 person head count barrier. That effects suppliers, construction etc, etc. For a long time I was a serial entrepreneur, then I took up consulting. I have not recommended my clients expand in specific states, in specific industries for some time now due to the unpredictable nature of regulation. That does not factor in other forms of competition. I’ll give you an example of how the environment businesses operate in has changed.. Most real estate is now leased on a 3N basis or triple net lease. 30 years ago that was not the case. What is the difference, well 30 years ago you simply had a lease cost, it was fixed price, so you knew what your baseline was. But now days, with tripe net eases you can be nailed for maintenance fees, increases in garbage pick-up, increase in taxes, the cost of repairs to the structure etc, etc, etc so it is very, very hard to establish a baseline when you are looking at the long term viability of a concept. And with 3N leases, there is no incentive for the landlord or city council to expenses low, it all flows through to those evil business owners.

Now you might ask, what the point of all that I just types is. The point is there are so many factors these days that form the environment a business has to operate in that you really need not only business analysis skills, but prognostic regulatory foresight in order to get it right. In other words it has gotten very, very complicated out there. The environment business operate under has changed. These days often it is the company with the best lobbyist that will win the day verses products in the marketplace.

This makes it very, very, very hard for anyone to consistently pick superior companies. Because there are so many factors that now war outside of the company itself that contribute to its success or failure.

You can have the best product there is, but it doesn’t matter when the State awards the contract to the business that funded a couple of politician election campaigns and sent out workers to campaign for them rather than yours. That is hard for an analyst to factor in as it is not transparent.
avalpert
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Re: Why is it hard to beat the market?

Post by avalpert »

Phineas J. Whoopee wrote:
avalpert wrote:
simplextableau wrote:It's not hard - wrong question. If you pick individual stocks, there's a pretty good chance you'll beat the market. However, there's also a pretty good chance you'll underperform the market.

The real problem is you won't know which of these outcomes is yours until you're 30 years in, and if you underperformed, well you've just screwed your retirement. The risk averse investor settles for the respectable market average and sleeps well at night.
You are going to have to define 'pretty good chance' more precisely...
If one deviates from a market portfolio it is all but certain one's long-term returns will differ from its.
PJW
That is true - is it equally likely that the returns will differ positively or negatively? I'm not sure the distribution of returns would support that conclusion.
North Texas Cajun
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Re: Why is it hard to beat the market?

Post by North Texas Cajun »

I think some investors and some fund managers will consistently beat the market for extended periods of time - perhaps 20 years or more. That doesn't mean they beat the market every quarter or every year. But, rather, almost every year.

The relevant question for me is this: Are those investors and fund managers who do consistently beat the market the result of hard work and skill? Or are they simply the products of randomness?

With a population of millions of investors and thousands of fund managers, we should expect to see - by simple randomness - some who do beat the market every year or almost every year of a 20 year period.
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aegis965
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Re: Why is it hard to beat the market?

Post by aegis965 »

It's easy to beat the market short-term.

Image

But hard to do so in the long term. (Or you'll end up owning the market.)

Image
(Portfolios with various CAGR, 1926-2013)

*
**
I may be biased.
TheNightsToCome
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Re: Why is it hard to beat the market?

Post by TheNightsToCome »

staythecourse wrote:Everyone has a different POV, but mine is all based on if one believes the markets are efficient enough or not. If one does believe in market efficiency then all the information known is already known by all the players in the field and is thus reflected in the current price. So that means the ONLY ways to know MORE then anyone else is either through 1. Inside information or 2. Speculation. That is it. If it is no. 1 then it is illegal and your all star manager eventually ends up in Jail or no. 2 it is just guessing in which case when does the lucky guessing end up wrong.

I believe there was a story in one of the esteemed authors on this forum that told of a story of true inside information. Rothschild used to have pigeons sent out and when a battle was won they used to put the messages on the pigeon on who won and flew back to him. So, he had several days advantage of acting on that information before anyone else did. That is the power of inside information. Now with high frequency trading any knowledge that may be known in advance is arbitraged away within milliseconds. Not so easy anymore.

In the end, as I have said numerous times the question is not can you beat the market. The answer is yes. Otherwise, no one would even do it. No one tries to run across a busy highway for a reason. NO one has ever survived. If a few did then you would see more folks try. The real question a retail investor has to ask is: Can you actively beat the market over even 1/2 of a person's investing time horizon (25 years) post fees, post taxes, and post inflation with a high probability vs. just doing the default option of index, passive investing? IF the answer is yes then one should consider it, but if not then best to just go the passive route.

Good luck.
When you are in school studying calculus or biochemistry, everyone in the class knows all the information. Nevertheless, when it is time to take the test, certain students always score at the top of the class while others score with the bottom. Having the facts is just a part of investing, and not nearly the most important part.
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Re: Why is it hard to beat the market?

Post by avalpert »

aegis965 wrote:It's easy to beat the market short-term.
The long-term is just the aggregate of a series of short-terms - if it was really easy to beat the market in the 'short-term' and you beat it every (or even most) short-term's it would also be easy to beat it in the long-term.
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aegis965
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Re: Why is it hard to beat the market?

Post by aegis965 »

avalpert wrote:
aegis965 wrote:It's easy to beat the market short-term.
The long-term is just the aggregate of a series of short-terms - if it was really easy to beat the market in the 'short-term' and you beat it every (or even most) short-term's it would also be easy to beat it in the long-term.
...if holding everything constant.
I may be biased.
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Taylor Larimore
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Re: Why is it hard to beat the market?

Post by Taylor Larimore »

Why is it hard to beat the market?
cal91:

The question in your opening post, and the replies you have received, help explain the reasons for investing in total market index funds like those in The Three-Fund Portfolio.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
jbolden1517
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Re: Why is it hard to beat the market?

Post by jbolden1517 »

Watty wrote:A mutual fund manager would be in the investing hall of fame if they could beat a comparable index fund by 1% a year over the long term. They also do stock picking as their full time job and have staff to help them. Thinking that you might be the market by a significant percent when you only spend a few hours a week on it it wishful thinking.
The returns of mutual funds are pretty bad. But there are plenty of mutual fund managers that have been a comparable index fund by well over 1% especially risk adjusted. That's not even rare. 4% wouldn't get you in the hall of fame. For example to pick my old favorite fund company

Oakmark select beat the SP500 for 19 years by an average of 4.6%
Oakmark Equity income beat the SP500 total return index by 1.2%
Oakmark Global beat MSCI world by 5.6%
Oakmark Global Select beat MSCI world by 3.2%
Oakmark International beat MSCI ex-USA by 3.8%
Oakmark Small international beat MSCI international small cap by 2.9%

Literally ever fund they sell over the lifetime of existence beat their index by over 1%.

The problem is not do managers exist that beat a comparable index. The problem is that it is as hard to identify those managers in advance as to stock pick. It requires the same sort of being different and being right. (I should also mention the above is a good example of the value premium in practice, Oakmark is a value house).
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Re: Why is it hard to beat the market?

Post by jbolden1517 »

Cal91 my suggestion to you is to ignore this.
arcticpineapplecorp. wrote:Have you read William Sharpe's (the creator of the Sharpe Ratio) short paper, "The Arithmetic of Active Management"? It's very short and easy to understand. Read it here:
Over any specified time period, the market return will be a weighted average of the returns on the securities within the market, using beginning market values as weights. Each passive manager will obtain precisely the market return, before costs4. From this, it follows (as the night from the day) that the return on the average actively managed dollar must equal the market return. Why? Because the market return must equal a weighted average of the returns on the passive and active segments of the market. If the first two returns are the same, the third must be also.
The problem is Sharpe is wrong about his theory. He's assuming that the entire universe of investors consists of passive minority shareholders whose return is being generated exclusively from the return of assets and from trading with other passive minority shareholders. That's obviously not true. There are control investors who can be generating return from market activity outside of capital gains and dividends. For example they can own the building the company is renting for its headquarters and be assuming control to boost their rental income. Their be dilution or concentration of stock. The actual trading patterns on stock can create synthetic profits in other markets like futures or options which then flow in and out of the total return.

This was a nice model when indexing was just one of many market strategies and all these other factors could be thought of as background noise, close enough. It is not a nice model when indexing is the dominant form of minority passive investing and the majority of other players left are not minority passive shareholders. It is time for Bogleheads to stop talking about a market where indexing is just one of many minority strategies and start addressing the reality of today's market where indexing is the minority strategy. The math is quite different.
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AllieTB1323
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Re: Why is it hard to beat the market?

Post by AllieTB1323 »

jbolden1517 wrote:
Watty wrote:A mutual fund manager would be in the investing hall of fame if they could beat a comparable index fund by 1% a year over the long term. They also do stock picking as their full time job and have staff to help them. Thinking that you might be the market by a significant percent when you only spend a few hours a week on it it wishful thinking.
The returns of mutual funds are pretty bad. But there are plenty of mutual fund managers that have been a comparable index fund by well over 1% especially risk adjusted. That's not even rare. 4% wouldn't get you in the hall of fame. For example to pick my old favorite fund company

Oakmark select beat the SP500 for 19 years by an average of 4.6%
Oakmark Equity income beat the SP500 total return index by 1.2%
Oakmark Global beat MSCI world by 5.6%
Oakmark Global Select beat MSCI world by 3.2%
Oakmark International beat MSCI ex-USA by 3.8%
Oakmark Small international beat MSCI international small cap by 2.9%

Literally ever fund they sell over the lifetime of existence beat their index by over 1%.

The problem is not do managers exist that beat a comparable index. The problem is that it is as hard to identify those managers in advance as to stock pick. It requires the same sort of being different and being right. (I should also mention the above is a good example of the value premium in practice, Oakmark is a value house).
I'm still a fan of Bill Nygren and Mario Gabelli but with today's information, reporting requirements and trading volumes I'm not certain their secret sauce works any longer.
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Re: Why is it hard to beat the market?

Post by avalpert »

aegis965 wrote:
avalpert wrote:
aegis965 wrote:It's easy to beat the market short-term.
The long-term is just the aggregate of a series of short-terms - if it was really easy to beat the market in the 'short-term' and you beat it every (or even most) short-term's it would also be easy to beat it in the long-term.
...if holding everything constant.
The only thing that needs to be held constant is the arrow of time. Really, there is no way around it - there is no true point when the short-term ends and the long-term begins outside of the simplifying assumptions of theory-world.
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Re: Why is it hard to beat the market?

Post by jbolden1517 »

AllieTB1323 wrote: I'm still a fan of Bill Nygren and Mario Gabelli but with today's information, reporting requirements and trading volumes I'm not certain their secret sauce works any longer.
It seems to be working. They are the mutual company I trust most. My old "simple portfolio" recommendation was Oakmark Global (a good recommendation as it turned out). I still hold their international small since I feel like I'm getting my ERs worth on that one. I'm having a harder time justifying the ER for the stuff with larger caps. Since you are also open, what are your thoughts on Tweedy Global if the dollar keeps dropping and I want the currency hedge plus the international value? ER is high but.. another house I trust.
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Re: Why is it hard to beat the market?

Post by jbolden1517 »

avalpert wrote:
aegis965 wrote:It's easy to beat the market short-term.
The long-term is just the aggregate of a series of short-terms - if it was really easy to beat the market in the 'short-term' and you beat it every (or even most) short-term's it would also be easy to beat it in the long-term.
Depends on the weightings of the winnings and losings. That's the reason large growth underperforms (and the reason generally that blend is not so hot). 100% large growth portfolio beats the market in most 3 year periods. But when it fails it fails really hard.

Think of it this way. Assume I offered you a deal. We roll the dice every year. I'll give you an extra 5% on your portfolio every year you don't roll doubles. When you roll doubles I take half. You beat the market most short term periods. You will have 10 year runs crushing the market's performance. And yet you lose over the long term inevitably.
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whodidntante
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Re: Why is it hard to beat the market?

Post by whodidntante »

Many actively managed mutual funds have stock picking as a core tenet. Stock picking is not expected to outperform after expenses. The fund sales literature will talk about the "fundamentals" and buying stocks that are "undervalued" without ever really defining what that means. There is probably a picture of an old man with his sleeves rolled up. Stock picking also adds a new set of risks such as manager risk and style risk. I recommend you avoid mutual funds that operate like that, unless you have no better option in something like a 401k or HSA.

However, you can quite easily construct a portfolio that is expected to outperform the market. For example, you can look at 10 year forward expected returns for various types of investments and overweight or even leverage the most promising investments and short the ones that your model says will go down. This would be tactical allocation. You can apply factor investing, to gain exposures to factors other than beta. You can take on a more aggressive asset allocation. Obviously all of these techniques come with their own set of risks, and I'm not suggesting you apply them.

The main theme of all of these techniques is is more risk, including the risk that you will look stupid for losing 10% when the S&P 500 had a great year. Many people are unable to continually put liquidity into an apparent meat grinder and think very short term. But these are high conviction, long-term strategies. This is why many financial advisors will play it safe, giving you a portfolio that will perform something like the S&P 500 with some bonds thrown in. A couple of bad years and you leave forever, and tell everyone you know that the advisor lost you a bunch of money.

And it is possible to construct a mutual fund that is expected to outperform the market. I believe there are such funds in existence today and it is possible to identify some of them because you look for the strategy that provides value, not a guy with his sleeves rolled up. This does not mean that investors will get it, or that they will stay with the fund when it underperforms whatever benchmark they chose to apply.
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Re: Why is it hard to beat the market?

Post by staythecourse »

TheNightsToCome wrote:
staythecourse wrote:Everyone has a different POV, but mine is all based on if one believes the markets are efficient enough or not. If one does believe in market efficiency then all the information known is already known by all the players in the field and is thus reflected in the current price. So that means the ONLY ways to know MORE then anyone else is either through 1. Inside information or 2. Speculation. That is it. If it is no. 1 then it is illegal and your all star manager eventually ends up in Jail or no. 2 it is just guessing in which case when does the lucky guessing end up wrong.

I believe there was a story in one of the esteemed authors on this forum that told of a story of true inside information. Rothschild used to have pigeons sent out and when a battle was won they used to put the messages on the pigeon on who won and flew back to him. So, he had several days advantage of acting on that information before anyone else did. That is the power of inside information. Now with high frequency trading any knowledge that may be known in advance is arbitraged away within milliseconds. Not so easy anymore.

In the end, as I have said numerous times the question is not can you beat the market. The answer is yes. Otherwise, no one would even do it. No one tries to run across a busy highway for a reason. NO one has ever survived. If a few did then you would see more folks try. The real question a retail investor has to ask is: Can you actively beat the market over even 1/2 of a person's investing time horizon (25 years) post fees, post taxes, and post inflation with a high probability vs. just doing the default option of index, passive investing? IF the answer is yes then one should consider it, but if not then best to just go the passive route.

Good luck.
When you are in school studying calculus or biochemistry, everyone in the class knows all the information. Nevertheless, when it is time to take the test, certain students always score at the top of the class while others score with the bottom. Having the facts is just a part of investing, and not nearly the most important part.
Not the same analogy. The analogy would be a college kid studying calculus taking a test and the questions were: 1. 1+1= ? and 2. 3+4= ?. That is what efficiency means to me. The data is SO READILY available and interpreted that those are the questions they are being asked to answer. Now how many of those folks are missing those questions? None. Again you are assuming there is some special insight or knowledge that no one has access to that gives the college kid (in this example) the knowledge over his competitors.

In the end, this conversation is like talking religion. No matter how much you talk folks are either going to believe it or not. It is VERY visceral. Funny, I don't believe in passive investing because I want to, I do it because I have not seen ANY evidence of anyone doing it consistently over even a 25 year period of time to justify changing from passive. Trust me, I wish this was not true. I would (just like most) spend HOURS upon HOURS of time sifting through data to find the winners or avoid the losers, but neither I nor anyone else has figured it out yet.

Let me know in 25-50 years how it turns out. Me personally, I am not going to implement a strategy that I have not seen ANY EVIDENCE it works. This goes back to the landmark paper written by Jensen in 1930's or so.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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Re: Why is it hard to beat the market?

Post by jbolden1517 »

whodidntante wrote:Many actively managed mutual funds have stock picking as a core tenet. Stock picking is not expected to outperform after expenses. The fund sales literature will talk about the "fundamentals" and buying stocks that are "undervalued" without ever really defining what that means.
At least for Oakmark they are reasonably specific
1) Use simple quantitative screens to develop a candidate list
2) Apply qualitative and deeper quantitative screens to determine a good estimate for the value of the businesses that came from the screens
3) Find 120-180 securities which are most mispriced (the fund list)
4) Fund managers select from this list to hit mutual fund goals like avoiding sector over concentration or geographic diversification

Again I've mainly moved from mutual funds to passive vehicles, and Oakmark was mainly given as a simple example that it isn't impossible to beat the market indexes at all (a great company with a disciplined approach, and the list of funds was short).
whodidntante wrote: The main theme of all of these techniques is is more risk, including the risk that you will look stupid for losing 10% when the S&P 500 had a great year. Many people are unable to continually put liquidity into an apparent meat grinder and think very short term. But these are high conviction, long-term strategies. This is why many financial advisors will play it safe, giving you a portfolio that will perform something like the S&P 500 with some bonds thrown in. A couple of bad years and you leave forever, and tell everyone you know that the advisor lost you a bunch of money.
Agreed. That's one of the reasons the value premium exists.
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Re: Why is it hard to beat the market?

Post by wrongfunds »

As Yogi Bera said, it is very easy. All you need to do is to buy good stock when it is priced low and sell it when it goes high. If the stock does not go high, you don't buy it. You keep on doing this and you will make lots and lots of money.
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Re: Why is it hard to beat the market?

Post by Fallible »

cal91 wrote:I mean, I am only invested in index funds so I clearly am convinced that it's not worth trying to beat the market.

But why is it that way... why is it so hard to beat the market?

To me, it makes sense that one could find companies that have good business models and leadership and are more likely to outperform the market. So why is it not this way?
Check out Charles Ellis's classic book, 7th ed., Winning the Loser's Game, and chapter 3, "Beating the Market." Should answer your question and many more. Also read the Introduction by David Swensen, Yale's chief investment officer, in which he writes:
The crux of the problem is that mutual fund managers generally fail to discharge their fiduciary responsibility to investors. Instead of putting investor interests front and center, which would require limiting assets under management to levels that might allow active management success, mutual fund managers succumb to the siren song of bloated funds that generate bloated profits."
He goes on to explain why the size is the "enemy of performance."
Last edited by Fallible on Thu Aug 03, 2017 11:59 am, edited 1 time in total.
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Re: Why is it hard to beat the market?

Post by Avo »

jbolden1517 wrote: Oakmark select beat the SP500 for 19 years by an average of 4.6%
Oakmark Equity income beat the SP500 total return index by 1.2%
Oakmark Global beat MSCI world by 5.6%
Oakmark Global Select beat MSCI world by 3.2%
Oakmark International beat MSCI ex-USA by 3.8%
Oakmark Small international beat MSCI international small cap by 2.9%
Funny how their flagship fund, Oakmark, is not on your list.

After a spectacular first few years in the early 90s, and much attention from the popular financial press, it crashed and burned in 1999. The manager (I forgot his name) was fired, and replaced by Bill Nygren (who was running the more focused Oakmark Select). Nygren then did very well to avoid the dotcom crash (though he also did dumb things like ride Washington Mutual down to zero).

Since the 2009 bottom, Oakmark does a little better than the S&P during run-ups, drops back to even during the minor downturns.
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Re: Why is it hard to beat the market?

Post by bengal22 »

Because the market is efficient(reflects current situation quickly and accurately) it is hard to beat the market(49.9%;luck if you do all the time) but it is easy to match the market(buy a fund that mimics the market). The real kicker is that this makes the expense ratio very critical because that is the amount you will underperform the market. An active fund manager will have to really beat the odds because they have to offset a larger expense ratio.
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Taylor Larimore
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Re: Why is it hard to beat the market?

Post by Taylor Larimore »

cal91:

It is very difficult for any individual to know more than the collective wisdom of millions of (mostly professional) investors which is a stock's current price.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
jbolden1517
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Re: Why is it hard to beat the market?

Post by jbolden1517 »

Avo wrote:
jbolden1517 wrote: Oakmark select beat the SP500 for 19 years by an average of 4.6%
Oakmark Equity income beat the SP500 total return index by 1.2%
Oakmark Global beat MSCI world by 5.6%
Oakmark Global Select beat MSCI world by 3.2%
Oakmark International beat MSCI ex-USA by 3.8%
Oakmark Small international beat MSCI international small cap by 2.9%
Funny how their flagship fund, Oakmark, is not on your list.

After a spectacular first few years in the early 90s, and much attention from the popular financial press, it crashed and burned in 1999. The manager (I forgot his name) was fired, and replaced by Bill Nygren (who was running the more focused Oakmark Select). Nygren then did very well to avoid the dotcom crash (though he also did dumb things like ride Washington Mutual down to zero).

Since the 2009 bottom, Oakmark does a little better than the S&P during run-ups, drops back to even during the minor downturns.
That omission was a mistake on my part due to their website I'll correct:
Oakmark fund (their flagship) has a 26 year track record. It beats the SP500 total return index by 2.9% for an average annual return of 12.89%

Image

You can see its done a lot better since the bottom in 2009.
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Re: Why is it hard to beat the market?

Post by Avo »

Looks very different on a log plot. It did do a bit better than the S&P coming off the bottom in 2009, but since 1/1/2010 it's been essentially the same as VFINX; look at a plot on M*.
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Re: Why is it hard to beat the market?

Post by arcticpineapplecorp. »

Avo wrote:Looks very different on a log plot. It did do a bit better than the S&P coming off the bottom in 2009, but since 1/1/2010 it's been essentially the same as VFINX; look at a plot on M*.
yes, the growth chart looks different going back to 1991 which is what the jbolden used as data (I started with 1/1/1991). here's what it actually looks like (blue S&P, orange oakmark fund):

Image

source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

and as Avo stated, since 1/1/2010 it has been about flat. Here's the picture and link here:

Image

source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
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