How to Underperform the Market

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Cartographer
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How to Underperform the Market

Post by Cartographer » Thu Aug 16, 2018 3:11 pm

I've been reading articles about how the average investor underperforms the market.

The claims usual cite the Dalbar study, and suggest that the average investor loses because their emotions cause them to buy high and sell low, or something to that effect. However, the Dalbar study has been criticized for comparing apples to oranges. Moreover, there's the obvious argument that all investors, over any time period, on average must have the the same return as the overall market (before costs) over that time period. Therefore, if investors are able to consistently lose to the market (by being emotional or by any other reason), then there should be a mirror strategy that consistently beats the market, simply by doing the opposite. But experience tells us that its extremely hard, if not impossible, to consistently beat the market.

At the same time, average investors underperforming jives with my own observations of family members and others, who have consistently trailed the market over long stretches of time, even if you ignore costs.

This post is therefore my attempt at coming up with possible explanations for why an individual investor can consistently lose to the market, with there being no corresponding winning strategy. I am only interested in ways to lose before costs, since paying ridiculous fees is of course a way to lose to the market. Any such losing strategy must exploit some inherent asymmetry in investing or the market. I don't claim any of the below "strategies" are novel nor that they haven't been discussed many times on the forum.



1. Time out of the market. This one's simple. If the average investor pulls out of the market due to fear of a crash, their returns will be reduced (in expectation) since the market usually goes up. There's not really an mirror strategy to being under-exposed to the market, unless you resort to leverage.


2. Missing out on the "free lunch" of diversification. While in aggregate, investor returns must match market returns, this is only true if we look at total returns for that period. If instead we look at returns over a large period, say 10 years, and we compute the average annualized return of investors (I thin the Dalbar study does this), and compare it to the annualized return of the market, it actually can be the case that the investor loses to the market. This is similar to the fact that the geometric mean can be lower than the arithmetic mean.

To illustrate: consider a market consisting of two stocks A and B, which start out in equal proportion. A returns 1% per year for 10 years, and B returns 10$ a year for 10 years. In aggregate, the market will return about 85% over the 10 year period, which is annualized to about 6.3%.

Now, suppose the market is owned by just 2 investors, 1 and 2. 1 owns all of A, and 2 owns all of B. The average 10 year return of 1 and 2 is similarly 85%. However, if we look at annualized returns, 1 has 1% and 2 has 10%, so the average annualized returns of the investors is 5.5%. Therefore, on an annualized basis, the average individual investor actually underperformed the market.

Therefore, a simple strategy to underperform the market on an annualized basis is simply to under-diversify, increasing the variance in your outcomes. More generally, any strategy that increases your variance without increasing returns will work. I'm sure various financial derivatives would be useful for this. Of course, there is some small chance you will happen to choose the winners and beat the market. But in expectation, your annualized returns will trail the market. As far as I can tell, there's no mirror strategy (how can you be more diversified than the market?)


3. Doubling down on stocks as they go to 0. Stocks can go to 0, but they cannot go to infinity. And yet, in order to make up for losing all your investment, you would need an infinite return on your next investment.

So here's how we can exploit this to lose to the market: start with an equal percentage in each of several companies, and then occasionally rebalance to maintain that percentage. If even a single company goes to 0, you'll end up rebalancing yourself all the way to zero. Since none of your investments will ever have infinite returns, you'll stay at 0 forever, clearly losing to the market.

Even worse (and what I've seen happen) is when one company goes down, you could employ the "it cannot possibly go any lower" mentality, and buy even more than rebalancing would require. You'll reach 0 that much faster.

Again, I don't think there's a mirror strategy, as such a strategy would require a stock to go to infinity.



Can anyone come up with other strategies to lose to the market?

BogleMelon
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Re: How to Underperform the Market

Post by BogleMelon » Thu Aug 16, 2018 3:34 pm

Just one simple reason IMHO: it is impossible to predict the future. You can't tell in advance who will be the next Netflix and who will be the next Enron. It is as simple as that. The rest of the other complicated reasons are just a consequence of that one major reason. i.e: give me a crystal ball and I will control my emotions knowing that a x company stock will recover in x months. Give me a crystal ball and I will diversify only through the winning stocks, and finally I would double on the stock that I know it will skyrocket, and sell immediately that one that will go to zero
Last edited by BogleMelon on Thu Aug 16, 2018 3:36 pm, edited 1 time in total.
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MotoTrojan
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Re: How to Underperform the Market

Post by MotoTrojan » Thu Aug 16, 2018 3:36 pm

I too have been confused at statements about the average investor missing out on the market average. Seems counter intuitive. Maybe the IRS is the winner if taxes are part of it :).

centrifuge41
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Re: How to Underperform the Market

Post by centrifuge41 » Thu Aug 16, 2018 3:39 pm

Cartographer wrote:
Thu Aug 16, 2018 3:11 pm
3. Doubling down on stocks as they go to 0. Stocks can go to 0, but they cannot go to infinity. And yet, in order to make up for losing all your investment, you would need an infinite return on your next investment.
I think you only need a 100% gain on your next investment of the same starting dollar amount to even out the first loss.

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tadamsmar
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Re: How to Underperform the Market

Post by tadamsmar » Thu Aug 16, 2018 3:49 pm

Cartographer wrote:
Thu Aug 16, 2018 3:11 pm
The claims usual cite the Dalbar study, and suggest that the average investor loses because their emotions cause them to buy high and sell low, or something to that effect.
My logic says that it insufficient just buy high and sell low to lose money where high and low are predicted on past data. My emotions must be causing me to switch to stocks that will be relative underperformers in the future. Therefore my emotions have the ability to predict future relative overperformers and underperformers. Therefore there must be a way to beat the market. The required information is somehow available to my emotions.

Carol88888
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Re: How to Underperform the Market

Post by Carol88888 » Thu Aug 16, 2018 4:00 pm

One thing that I have noticed in my own experience from buying individual stocks is that sometimes one can be absolutely correct in the pick of a security and yet sell it too soon to repeap the whole benefit. It's devilishly hard knowing when to take profits.

Also, hard is having the discipline to cut losses short.

So the individual investor jumps around too much, trading too much, and paying taxes too frequently and ends up underperforming.

But I do believe there is a class of investor that just buys and hold individual stocks that does outperform. They outperform by pre-selecting stocks from a list of quality issues (say S&P financial ratings) and then just sit on them for decades. This, too, is devilishly hard to do but it can be done by the very few with great patience who have decades of time ahead of them and the grit to hold on when the market collapses.

Cartographer
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Re: How to Underperform the Market

Post by Cartographer » Thu Aug 16, 2018 4:11 pm

Carol88888 wrote:
Thu Aug 16, 2018 4:00 pm
One thing that I have noticed in my own experience from buying individual stocks is that sometimes one can be absolutely correct in the pick of a security and yet sell it too soon to repeap the whole benefit. It's devilishly hard knowing when to take profits.

Also, hard is having the discipline to cut losses short.

So the individual investor jumps around too much, trading too much, and paying taxes too frequently and ends up underperforming.

But I do believe there is a class of investor that just buys and hold individual stocks that does outperform. They outperform by pre-selecting stocks from a list of quality issues (say S&P financial ratings) and then just sit on them for decades. This, too, is devilishly hard to do but it can be done by the very few with great patience who have decades of time ahead of them and the grit to hold on when the market collapses.
But the claims are often that the average investor trails the market by a significant margin. Even if a select few can beat the market over the long run by a small amount, this is not enough to offset the bulk of investors supposedly losing by a lot.

Cartographer
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Re: How to Underperform the Market

Post by Cartographer » Thu Aug 16, 2018 4:19 pm

tadamsmar wrote:
Thu Aug 16, 2018 3:49 pm
Cartographer wrote:
Thu Aug 16, 2018 3:11 pm
The claims usual cite the Dalbar study, and suggest that the average investor loses because their emotions cause them to buy high and sell low, or something to that effect.
My logic says that it insufficient just buy high and sell low to lose money where high and low are predicted on past data. My emotions must be causing me to switch to stocks that will be relative underperformers in the future. Therefore my emotions have the ability to predict future relative overperformers and underperformers. Therefore there must be a way to beat the market. The required information is somehow available to my emotions.
Yes, the logical consequence of the claim that investor emotions cause us to buy high and sell low is that our emotions have predictive power, we're just interpreting them backwards. But if this were true, then we could just do the opposite of whatever we were about to do, and we'd be sure to beat the market.

This is why the emotions argument is unsatisfying to me. However, I do believe (based on my own observations) that it is possible to lose to the market, and emotions may be in part to blame. But it has to be the result of something that cannot be effectively reversed. The best example I think is selling everything in a panic. You're guaranteed to lose, not because you incorrectly predicted a crash, but simply because the market usually goes up.

Cartographer
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Re: How to Underperform the Market

Post by Cartographer » Thu Aug 16, 2018 4:21 pm

centrifuge41 wrote:
Thu Aug 16, 2018 3:39 pm
Cartographer wrote:
Thu Aug 16, 2018 3:11 pm
3. Doubling down on stocks as they go to 0. Stocks can go to 0, but they cannot go to infinity. And yet, in order to make up for losing all your investment, you would need an infinite return on your next investment.
I think you only need a 100% gain on your next investment of the same starting dollar amount to even out the first loss.
Fair enough. But if your investment goes to zero, you'll need more inflows in order to have any investment at all. Any returns from that point forward are on your new money, not the old money.

sc9182
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Re: How to Underperform the Market

Post by sc9182 » Thu Aug 16, 2018 5:00 pm

Going to ZERO shouldn't be a total loss, you could use tax-loss as backstop by deducting losses if in Brokerage accounts (non tax-advantaged space).

Or you could get creative by selling winning stock, using all those monies to buy the soon-to--be-zero stock. In this case, you will likely come out NEGATIVE, because you owe taxes on gains of winning stock sale, and haven't paid taxes on those gains yet! Your balance may be less than zero at this point due to unpaid cap-gains taxes!

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tadamsmar
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Re: How to Underperform the Market

Post by tadamsmar » Thu Aug 16, 2018 5:40 pm

Cartographer wrote:
Thu Aug 16, 2018 4:19 pm
tadamsmar wrote:
Thu Aug 16, 2018 3:49 pm
Cartographer wrote:
Thu Aug 16, 2018 3:11 pm
The claims usual cite the Dalbar study, and suggest that the average investor loses because their emotions cause them to buy high and sell low, or something to that effect.
My logic says that it insufficient just buy high and sell low to lose money where high and low are predicted on past data. My emotions must be causing me to switch to stocks that will be relative underperformers in the future. Therefore my emotions have the ability to predict future relative overperformers and underperformers. Therefore there must be a way to beat the market. The required information is somehow available to my emotions.
Yes, the logical consequence of the claim that investor emotions cause us to buy high and sell low is that our emotions have predictive power, we're just interpreting them backwards. But if this were true, then we could just do the opposite of whatever we were about to do, and we'd be sure to beat the market.

This is why the emotions argument is unsatisfying to me. However, I do believe (based on my own observations) that it is possible to lose to the market, and emotions may be in part to blame. But it has to be the result of something that cannot be effectively reversed. The best example I think is selling everything in a panic. You're guaranteed to lose, not because you incorrectly predicted a crash, but simply because the market usually goes up.
Don't confuse "it is possible" with "there is some tendency toward it".

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vitaflo
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Re: How to Underperform the Market

Post by vitaflo » Thu Aug 16, 2018 5:49 pm

If you invest in a market index fund with a high expense ratio you are guaranteed to underperform the market.

Edit: I missed your “before costs” rule. Still it’s good to remind the people how much cost matters.
Last edited by vitaflo on Thu Aug 16, 2018 5:51 pm, edited 1 time in total.

Fallible
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Re: How to Underperform the Market

Post by Fallible » Thu Aug 16, 2018 5:50 pm

The many, many reasons for underperformance are listed in the best investment books, including Winning the Loser's Game by Charles Ellis (pgs. 61-63), A Wealth of common Sense by Ben Carlson (pgs. 20-25), The Four Pillars of Investing by Bill Bernstein ("The Psychology of Investing" pillar), etc. There's also a good book on the subject, The Behavior Gap, by Carl Richards.

Carlson says the "unifying theme" that causes investor mistakes is that we're human, i.e., our emotions, even though they are not all bad: "You just have to determine when they are useful and when they are destructive to be able to control them in certain situations." He goes on to list traits of successful investors, beginning with emotional intelligence, patience, etc.
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Cartographer
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Re: How to Underperform the Market

Post by Cartographer » Thu Aug 16, 2018 6:34 pm

Fallible wrote:
Thu Aug 16, 2018 5:50 pm
The many, many reasons for underperformance are listed in the best investment books, including Winning the Loser's Game by Charles Ellis (pgs. 61-63), A Wealth of common Sense by Ben Carlson (pgs. 20-25), The Four Pillars of Investing by Bill Bernstein ("The Psychology of Investing" pillar), etc. There's also a good book on the subject, The Behavior Gap, by Carl Richards.

Carlson says the "unifying theme" that causes investor mistakes is that we're human, i.e., our emotions, even though they are not all bad: "You just have to determine when they are useful and when they are destructive to be able to control them in certain situations." He goes on to list traits of successful investors, beginning with emotional intelligence, patience, etc.
I haven't read any of the books, but have read synopses about some of them and comments by some of the authors. It seems that they only superficially touch on the issue of emotions negatively impacting investor returns, saying things like "chasing winners" and "buying high, selling low." These explanations aren't that compelling to me: they don't really seem to address the fact that investors, on aggregate, must match market returns (before costs), since they ARE the market. If an individual is able to consistently buy high and sell low, why can't I (or some institutional investor) just do the opposite and then consistently beat the market?

I agree that emotions may play a role in investors time and time again doing poorly with their investments. But how do our emotional decisions actually result in underperformance? It would seem (based on the inability of most people to consistently beat the market) that the real reasons have to be something that others cannot capitalize on, such as time out of the market, or lack of diversification.

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vineviz
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Re: How to Underperform the Market

Post by vineviz » Thu Aug 16, 2018 6:43 pm

Cartographer wrote:
Thu Aug 16, 2018 6:34 pm


I haven't read any of the books, but have read synopses about some of them and comments by some of the authors. It seems that they only superficially touch on the issue of emotions negatively impacting investor returns, saying things like "chasing winners" and "buying high, selling low." These explanations aren't that compelling to me . . . .
I suspect that if you read the books that you’d be in a better position to decide whether the arguments IN those books are compelling or not.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

sambb
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Re: How to Underperform the Market

Post by sambb » Thu Aug 16, 2018 6:56 pm

or invest in a stable economy, in a booming growth country, that has no wars on the horizon... like Japan
there is no guarantee that the US will go up forever, past performance doesnt predict future results

Cartographer
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Re: How to Underperform the Market

Post by Cartographer » Thu Aug 16, 2018 8:11 pm

vineviz wrote:
Thu Aug 16, 2018 6:43 pm
Cartographer wrote:
Thu Aug 16, 2018 6:34 pm


I haven't read any of the books, but have read synopses about some of them and comments by some of the authors. It seems that they only superficially touch on the issue of emotions negatively impacting investor returns, saying things like "chasing winners" and "buying high, selling low." These explanations aren't that compelling to me . . . .
I suspect that if you read the books that you’d be in a better position to decide whether the arguments IN those books are compelling or not.
Fair enough. I usually don't buy things when there are good free resources available, so I've been self-educating using free resources on the web (hence how I found this site). But motivated by your comment, I randomly selected "Four Pillars" from Fallible's book list, downloaded it, and read over the section on psychology. The section contains a lot of good examples bad investor behavior. Some of the examples lead to lower returns through high costs or time out of the market. But for many example, the book doesn't directly describe how such behavior leads to lower returns.

For example, individual investors apparently gravitate toward low-probability high-payoff bets. But that doesn't mean they lose in expectation. If they did, the folks on the other side of those bets would be able to consistently beat the market. The book does not address this fact. Now, it could mean that they have a higher variance in outcomes, which could lead to lower returns through point 2 in my OP, but the book doesn't discuss this.

In another example, the book basically states that by chasing growth stocks, investors underperform. But if growth stocks actually underperform long term, presumably they are safer investments. I guess this points to a 4th way that investors can trail the market: by taking on less risk. While strictly true that you end up with lower returns, I don't really count this as a losing strategy, since you are getting something for your decreased performance.

The book also discusses mean reversion, and seems to claim that it is responsible for some of the lost returns. But if my bad behavior causes me to time trades poorly due to mean reversion, why can't I do the opposite and capitalize on it?

columbia
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Re: How to Underperform the Market

Post by columbia » Thu Aug 16, 2018 8:17 pm

Investing in Russia comes to mind.

greenhill
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Re: How to Underperform the Market

Post by greenhill » Thu Aug 16, 2018 9:42 pm

I think it is more accurate to say that half of the capital beat the market, not half of the investors. Many rich people have the connections to get insider information that we don't know. Corporate investors have much more resources than us to obtain and analyze market data.

I agree that emotion is the main explanation for those who invest horribly. OTOH, I do know some individual stock pickers who are reasonably good in both emotion and financial knowledge, most of them are doing good enough to outperform cash and bonds, but still manage to lag behind the market somehow. I think good emotion and financial knowledge may significantly reduce the chance of disastrous outcome, but it is almost impossible for an individual investor without any connections or resources to beat the market.

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Re: How to Underperform the Market

Post by bradpevans » Thu Aug 16, 2018 10:49 pm

Cartographer wrote:
Thu Aug 16, 2018 3:11 pm
I've been reading articles about how the average investor underperforms the market.

The claims usual cite the Dalbar study, and suggest that the average investor loses because their emotions cause them to buy high and sell low, or something to that effect. However, the Dalbar study has been criticized for comparing apples to oranges. Moreover, there's the obvious argument that all investors, over any time period, on average must have the the same return as the overall market (before costs) over that time period. Therefore, if investors are able to consistently lose to the market (by being emotional or by any other reason), then there should be a mirror strategy that consistently beats the market, simply by doing the opposite. But experience tells us that its extremely hard, if not impossible, to consistently beat the market.

At the same time, average investors underperforming jives with my own observations of family members and others, who have consistently trailed the market over long stretches of time, even if you ignore costs.

This post is therefore my attempt at coming up with possible explanations for why an individual investor can consistently lose to the market, with there being no corresponding winning strategy. I am only interested in ways to lose before costs, since paying ridiculous fees is of course a way to lose to the market. Any such losing strategy must exploit some inherent asymmetry in investing or the market. I don't claim any of the below "strategies" are novel nor that they haven't been discussed many times on the forum.



1. Time out of the market. This one's simple. If the average investor pulls out of the market due to fear of a crash, their returns will be reduced (in expectation) since the market usually goes up. There's not really an mirror strategy to being under-exposed to the market, unless you resort to leverage.


2. Missing out on the "free lunch" of diversification. While in aggregate, investor returns must match market returns, this is only true if we look at total returns for that period. If instead we look at returns over a large period, say 10 years, and we compute the average annualized return of investors (I thin the Dalbar study does this), and compare it to the annualized return of the market, it actually can be the case that the investor loses to the market. This is similar to the fact that the geometric mean can be lower than the arithmetic mean.

To illustrate: consider a market consisting of two stocks A and B, which start out in equal proportion. A returns 1% per year for 10 years, and B returns 10$ a year for 10 years. In aggregate, the market will return about 85% over the 10 year period, which is annualized to about 6.3%.

Now, suppose the market is owned by just 2 investors, 1 and 2. 1 owns all of A, and 2 owns all of B. The average 10 year return of 1 and 2 is similarly 85%. However, if we look at annualized returns, 1 has 1% and 2 has 10%, so the average annualized returns of the investors is 5.5%. Therefore, on an annualized basis, the average individual investor actually underperformed the market.

Therefore, a simple strategy to underperform the market on an annualized basis is simply to under-diversify, increasing the variance in your outcomes. More generally, any strategy that increases your variance without increasing returns will work. I'm sure various financial derivatives would be useful for this. Of course, there is some small chance you will happen to choose the winners and beat the market. But in expectation, your annualized returns will trail the market. As far as I can tell, there's no mirror strategy (how can you be more diversified than the market?)


3. Doubling down on stocks as they go to 0. Stocks can go to 0, but they cannot go to infinity. And yet, in order to make up for losing all your investment, you would need an infinite return on your next investment.

So here's how we can exploit this to lose to the market: start with an equal percentage in each of several companies, and then occasionally rebalance to maintain that percentage. If even a single company goes to 0, you'll end up rebalancing yourself all the way to zero. Since none of your investments will ever have infinite returns, you'll stay at 0 forever, clearly losing to the market.

Even worse (and what I've seen happen) is when one company goes down, you could employ the "it cannot possibly go any lower" mentality, and buy even more than rebalancing would require. You'll reach 0 that much faster.

Again, I don't think there's a mirror strategy, as such a strategy would require a stock to go to infinity.



Can anyone come up with other strategies to lose to the market?
. Moreover, there's the obvious argument that all investors, over any time period, on average must have the the same return as the overall market (before costs) over that time period.

^^ I see no reason why this should hold true

buylowbuyhigh
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Re: How to Underperform the Market

Post by buylowbuyhigh » Fri Aug 17, 2018 1:25 am

One should be very clear on what "average" exactly means here.

It is quite intuitive that the average dollar invested in the market has the same return as the market (before costs and taxes), but the average investor has significantly lower returns. The median investor will lose because there is a lower limit (-100%) but no natural upper limit. The mean of the investor returns is quite possibly also lower, if you don't take a dollar weighted mean. This would then be quite hard to measure. If someone pulls out from the market for a period of time, is she still included in the group of investors during that time or should her weight be 0?

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tadamsmar
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Re: How to Underperform the Market

Post by tadamsmar » Fri Aug 17, 2018 2:30 am

Dalbar has serious methodological flaws, Wade Pfau finds:

"However, my concern is that the quantitative results of the study do not properly measure the underperformance of investors. DALBAR’s method for calculating average investor returns unfairly understates these returns. There is a methodological flaw that I will explain, which is that DALBAR does not properly calculate an internal rate-of-return for an ongoing series of cash flows, which renders its results meaningless."

As discussed in this thread:

viewtopic.php?t=213735

Some say the Dalbar study is just a scam to try to convince investors to use a paid advisor.

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JoMoney
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Re: How to Underperform the Market

Post by JoMoney » Fri Aug 17, 2018 4:15 am

Taking on too much risk. People who look at gamblers will often bring up "bankroll management" and point out that many gamblers would lose even if the odds were fair or in their favor because of poor bankroll management.
Even with a positive expectation, there is some chance the player will hit a losing streak, it's actually certain to happen if the player repeats the bet often enough. If the player's bets are too large relative to their bankroll a losing streak could deplete the bankroll to a point that it has no hope of recovery.
Edward Thorp in one of his papers looked at the 59 year period from 1929-1984 and came up with 117% invested in S&P500 as being Kelly optimal growth, and at 170% being pretty certain of hitting a ruinous sequence of returns at some point..
http://www.edwardothorp.com/wp-content/ ... Market.pdf
"...maximal average real growth will occurr (should margin at the T-bill rate be available) if one invests 117%..."
"...a hypothetical immortal investor continually wagering an amount greater than 1.7 times current resources, ruin is certain..."
"...somewhat artificially constructed probability distributions may not be fully taking into account ... numerical results we have obtained must be interpreted in light of the limitations inherent in any applied probabilistic model."
Regarding the Dalbar studies and the "Behavior Gap" found in mutual funds, I've pondered if some of that might be related to a measurement problem known as "The Inspection Paradox". If so, then it's pretty much a certainty that random trades between two investments with unevenly distributed returns will appear to be poorly timed relative to the same time period of either investment alone.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: How to Underperform the Market

Post by The Wizard » Fri Aug 17, 2018 4:29 am

All of my stock funds get market returns, by definition.
I never "go to cash" therefore I get market returns.

But what about rebalancing?
International stocks have underperformed in recent months.
So maybe I move $20k from US stocks to international.
Does that action improve or worsen my return relative to the market?
Attempted new signature...

cjking
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Re: How to Underperform the Market

Post by cjking » Fri Aug 17, 2018 4:55 am

Therefore, if investors are able to consistently lose to the market (by being emotional or by any other reason), then there should be a mirror strategy that consistently beats the market, simply by doing the opposite.
I know a company who do precisely this. I have posted about them before. In the UK, spread-betting companies will allow you go go long or short of almost anything (equity, bond, currency, commodity, futures, options) traded on any financial exchange, anywhere in the world. They claim to make their money by charging a fractionally wider spread than market-makers on the underlying market. They also claim to hedge their position in the underlying markets, so they don't care whether you win or lose. However the company I have in mind went public, and in their prospectus they revealed that they try as far as possible, i.e. as far as their capital allows, not to hedge customer positions. Apparently, when you let people (like their customers) trade whatever they like at close to fair market prices, they will almost always lose money, so you can make money by taking the other side of whatever they want to do.

I would guess a big part of why their customers lose is simply mishandling leverage, the size of your positions can be multiples of the cash you put in your account.

Another example of where someone gets the other side of underperformance: apparently in Taiwan individual share investing is (or was when I read this) a very big thing among individual investors, who did indeed under-perform the market by a sizeable amount. The participation by these under-achievers is/was so great that it allowed professional fund-managers to out-perform the market.

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Re: How to Underperform the Market

Post by SelfEmployed123 » Fri Aug 17, 2018 6:07 am

Interesting thread. In addition to falling prey to our emotions, I would propose that cognitive bias is another reason why investors underperform. Cognitive bias is a systematic deviation from rational thinking...aka faulty logic. We are all prone to making fallacies in our logic, particularly as it relates to investing. If you really want to believe Company X is worth investing in because you already own Y shares, you will tune out information to the contrary (Confirmation Bias). Hours spent day trading can lead to poorer and poorer decisions (Decision Fatigue). Many people dramatically overestimate their skill at investing (Dunning-Kruger effect). When you own a stock, you arbitrarily put a higher value on it and are less likely to sell (Endowment Effect). Then there's the belief that a market that continues to go up and up must come down soon which will lead to many people to spend less time in the market (Gambler's Fallacy). There's also a tendency for us to just follow the herd. We buy high because everyone is buying high and sell low because that's what everyone else is doing (Herd Behavior).

I'm not sure what bias this falls under, but there is definitely a tendency to believe that investing involves skill in the same way that other more tangible activities involve skill. If you have this belief, you are more likely to fall prey to the hoards of newsletters and false profits and all of their bad stock picking advice. In the end I think Jack Bogle's statement "nobody knows nothing" is the antidote to this. When you accept the fact that for the retail investor skill takes a back seat to diversification and time in the market, you are less prone to making these mistakes.

I think cognitive biases are not the same as falling prey to your emotions. Emotions can lead to faulty thinking, but sometimes your thinking is contaminated by its own faulty logic and emotion has nothing to do with it. Cognitive biases are like programing bugs in the software of your brain. The only way to debug it is to create a plan, stick with it, and deviate as little as possible.
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Re: How to Underperform the Market

Post by tadamsmar » Fri Aug 17, 2018 1:06 pm

It would be interesting if there was a mutual fund that absorbed the inflows/outflows from other funds of the same mutual fund company. It could have a very low fee because it reduces the need/cost for the mutual fund company to go trade in the market. It would be contrarian to the relative inflows and outflows from other mutual funds.

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Re: How to Underperform the Market

Post by Fallible » Fri Aug 17, 2018 1:35 pm

SelfEmployed123 wrote:
Fri Aug 17, 2018 6:07 am
...
I think cognitive biases are not the same as falling prey to your emotions. Emotions can lead to faulty thinking, but sometimes your thinking is contaminated by its own faulty logic and emotion has nothing to do with it. ...
What are examples of where cognitive (faulty thinking) is not affected by, or the result of, emotions?
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Re: How to Underperform the Market

Post by 2015 » Fri Aug 17, 2018 1:55 pm

Opting for complexity increases anti-fragility and is a significant contributor to under performance if for no other reason than its relationship to perceptual and cognitive bias errors.

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Re: How to Underperform the Market

Post by H-Town » Fri Aug 17, 2018 2:12 pm

Cartographer wrote:
Thu Aug 16, 2018 3:11 pm
Can anyone come up with other strategies to lose to the market?
I think you should first define the market: what benchmark are we using? If investors use index fund tracking an index, the return before fee should be very close to their corresponding benchmark. There might be some tracking error that could go either way.

If investors choose to invest in smaller sample (sector specific, FAANG stock, factor investing, etc.), then there's a chance that they overperform or underperform the broad market index.

What you're trying to get at is behavioral issues when it comes to investing.

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Re: How to Underperform the Market

Post by SelfEmployed123 » Fri Aug 17, 2018 2:38 pm

Fallible wrote:
Fri Aug 17, 2018 1:35 pm
SelfEmployed123 wrote:
Fri Aug 17, 2018 6:07 am
...
I think cognitive biases are not the same as falling prey to your emotions. Emotions can lead to faulty thinking, but sometimes your thinking is contaminated by its own faulty logic and emotion has nothing to do with it. ...
What are examples of where cognitive (faulty thinking) is not affected by, or the result of, emotions?
There's definitely an interaction between the two, but emotions are not the only cause of faulty thinking. Faulty logic can lead to all kinds of bad decisions without being caused by strong emotions. . This article has a bit more: https://www.investopedia.com/articles/i ... esting.asp
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

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Re: How to Underperform the Market

Post by Fallible » Fri Aug 17, 2018 7:55 pm

SelfEmployed123 wrote:
Fri Aug 17, 2018 2:38 pm
Fallible wrote:
Fri Aug 17, 2018 1:35 pm
SelfEmployed123 wrote:
Fri Aug 17, 2018 6:07 am
...
I think cognitive biases are not the same as falling prey to your emotions. Emotions can lead to faulty thinking, but sometimes your thinking is contaminated by its own faulty logic and emotion has nothing to do with it. ...
What are examples of where cognitive (faulty thinking) is not affected by, or the result of, emotions?
There's definitely an interaction between the two, but emotions are not the only cause of faulty thinking. Faulty logic can lead to all kinds of bad decisions without being caused by strong emotions. . This article has a bit more: https://www.investopedia.com/articles/i ... esting.asp
These emotional/cognitive categories (also in the BH wiki under "Behavioral Pitfalls") don't necessarily preclude a connection. From research by Kahneman and Tversky and many others, it appears that emotions, which are known to be largely unconscious, may lurk in some form and to various degrees in most and possibly all cognitive biases, in all thinking. The relatively new field of brain imaging is helping to show how and where that happens. Fascinating stuff.
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Re: How to Underperform the Market

Post by Taylor Larimore » Fri Aug 17, 2018 9:23 pm

Cartographer:

This article by Nobel Laureate, Wm. Sharpe, will help answer your question:

The Arithmetic of Active Management

Best wishes.
Taylor
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Re: How to Underperform the Market

Post by Dude2 » Fri Aug 17, 2018 9:54 pm

If an investor owns the market, then, if they never leave the market, they will never lose, right?

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Re: How to Underperform the Market

Post by Taylor Larimore » Fri Aug 17, 2018 10:08 pm

Dude2 wrote:
Fri Aug 17, 2018 9:54 pm
If an investor owns the market, then, if they never leave the market, they will never lose, right?
Sorry, this is incorrect. Stock investors, whether they own the market or not, can lose money.

The beauty of owning the market is that the investor will never suffer below market returns (less costs).

Best wishes.
Taylor
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Re: How to Underperform the Market

Post by Dude2 » Fri Aug 17, 2018 10:14 pm

Yes, sorry Taylor, I was getting a little philosophical there and not practical. If we define the market as the reference frame and we cling to it for dear life, then by definition we cannot lose. The market itself can go up and down, but if nobody can consistently beat it over time, there is no better place to be. Therefore, any deviation from it is a guaranteed loss. Yes, this is not practical, but if we define the reference frame as such it must be true.

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Re: How to Underperform the Market

Post by CurlyDave » Sat Aug 18, 2018 1:10 am

There are many ways to underperform the market.

I have a neighbor, a good guy, solid great friend. But, he thought that the way to invest in stocks was through "tips" he got from people. He has lost money on every investment he has ever made, and now believes that "no one can make money in stocks".

The he looks at us and decides that maybe I am the only person in town who can make money on stocks. OTOH, he has never once asked how to do it.

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Re: How to Underperform the Market

Post by SelfEmployed123 » Sat Aug 18, 2018 9:57 am

Fallible wrote:
Fri Aug 17, 2018 7:55 pm
SelfEmployed123 wrote:
Fri Aug 17, 2018 2:38 pm
Fallible wrote:
Fri Aug 17, 2018 1:35 pm
SelfEmployed123 wrote:
Fri Aug 17, 2018 6:07 am
...
I think cognitive biases are not the same as falling prey to your emotions. Emotions can lead to faulty thinking, but sometimes your thinking is contaminated by its own faulty logic and emotion has nothing to do with it. ...
What are examples of where cognitive (faulty thinking) is not affected by, or the result of, emotions?
There's definitely an interaction between the two, but emotions are not the only cause of faulty thinking. Faulty logic can lead to all kinds of bad decisions without being caused by strong emotions. . This article has a bit more: https://www.investopedia.com/articles/i ... esting.asp
These emotional/cognitive categories (also in the BH wiki under "Behavioral Pitfalls") don't necessarily preclude a connection. From research by Kahneman and Tversky and many others, it appears that emotions, which are known to be largely unconscious, may lurk in some form and to various degrees in most and possibly all cognitive biases, in all thinking. The relatively new field of brain imaging is helping to show how and where that happens. Fascinating stuff.
Kahneman and Tversky have written a lot about heuristics and biases. Their research points to this idea that we have two decision making systems: system 1 (rational) and system 2 (intuitive). Rational decision making is laborious and uses logic. Intuitive decision making is largely unconscious and is quick due to its use of mental shortcuts (heuristics). Kahneman and Tversky's research shows us the many ways our intuition can lead us astray. I think when most people on this forum refer to emotions, they are referring to intuition.
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Re: How to Underperform the Market

Post by Taylor Larimore » Sat Aug 18, 2018 10:37 am

Cartographer:

According to many experts, the easiest way to "underperform" the market is to try and "beat the market."
Jack Bogle: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- In my view, owning the market and holding it forever is the ultimate strategy for winners." --

Peter Brimlow, former senior editor of Forbes: "It's extremely difficult to beat the market."

Scott Burns, columnist, author: "The odd are really, really poor than any of us will do better than a low-cost broad index fund."

Andrew Clarke, co-author of Wealth of Experience: "If your stock portfoliio looks very different from the broad stock market, you're assuming additional risk that may, or may not, pay off."

John Cochrane, President American Finance Association: "The market in aggregate always gets the allocation of capital right."

Jonathan Clements, author and Wall Street Journal columnist: "If you want a surefire strategy for outpacing most other U.S. stock investors, simply shovel money into an index fund that tracks a broad U.S. market index such as the Wilshire 5000 or the Russell 3000."

Jim Dahle, adviser and author of The White Coat Investor: When interviewing potential advisers, one of the first questions I would ask is: “Can you beat the market yourself or choose mutual fund managers who can?” If the answer is "yes", stand up and walk out."

Dalbar Research: "In 2014, the average investor in a stock mutual fund underperformed the S&P 500 by a margin of 8.19 percent. Fixed-income investors underperformed the Barclays Aggregate Bond Index by a margin of 4.81 percent."

Charles Ellis, author of "The Loser's Game": "Most of the managers and clients who insist on trying to beat the market, either on their own or with professional managers, will be disappointed by the results. It is a loser's game."

Edesess . Tsui . Fabbri . Peacock, authors of "The Three Simple Rules of Investing": "The end results of the theories of Nobel Laureates in finance is that the most efficient portfolio is one that mirrors the whole market, a total market index fund."

Prof. Eugene Fama, Nobel Laureate: " For most people, the market portfolio is the most sensible decision."

Paul Farrell, author of The Lazy Person's Guide to Investing: "The market is totally random, irrational, and unpredictable. And it loves humbling the mighty. Try to beat it and you'll lose money."

Bob French, CFA, McLean’s Director of Investment Analysis: "You can’t beat the market. It’s basically impossible to guess which company is going to be the next Apple or Google, or even which way the market will go. So don’t try."

Steven Goldberg, Kiplinger magazine columnist: "You simply have no reason not to invest in index funds—funds that track broad market indexes rather than try to beat them."

Alan Greenspan, former Chairman of the Federal Reserve: "Prices in the marketplace are by definition the right price."

SpencerJakab, author of Heads I Win, Tails I Win: "The typical individual investor would have a nest egg at least twice as large if they simply tracked the market."

Christoper Jones, author of The Intelligent Portfolio and CFO of Financial Engines: "Standard financial economic theory dictates that the market portfolio is efficient and that it has the highest expected return of any portfolio for that level of volatility."

Darrow Kirkpatrick, author of Retiring Sooner: "Nobody can predict the future or outperform the market over the long haul."

Prof. Burton Malkiel, author of the classic Random Walk Down Wall Street: "Buying and holding a broad-based index fund is still the only game in town."

Harry Markowitz, Nobel Laureate: "A foolish attempt to beat the market and get rich quickly will make one's broker rich and oneself much less so."

Moshe A Milevsky, author of The Probability of Fortune: "I am somewhat skeptical about anyone's ability to consistently beat the market."

Bill Miller, famed fund manager: "With the market beating 91% of surviving managers since the beginning of 1982, it looks pretty efficient to me."

Merton Miller, Nobel Laureate: "Most people might just as well buy a share of the whole market, which pools all the information, than delude themselves into thinking they know something the market doesn't."

Mr. Money Mustache: " I’ve always said “Just buy the Vanguard Total Market Index fund (ticker symbol VTI).” That gives you a near-optimal ownership of hundreds of companies, in single giant, stable, low-fee fund run by an honest company. Over time, this single investment will outperform over 90% of financial advisers and other funds, while letting you sleep well at night.

"Morningstar (10-19-2012) named Vanguard's Total Stock Market Index Fund: "Our favorate U.S. Equity ETF."

Charles Munger, Vice-Chairman Berkshire Hathaway: "Few in the universe exceed the market returns (on a regular basis). It's like finding a needle in a haystack."

John Norstad, Northwestern University: "Total Stock Market is efficient, in the sense that no other US stock portfolio can be more efficient than TSM (have lower risk and higher expected return)."

Quartz news: "As always, in investing it generally pays in the long run to opt for broad-based, low-cost index funds. Anything else is likely a money-losing gimmick."

Pat Regnier, former Morningstar analyst: "We should just forget about choosing fund managers and settle for index funds to mimic the market."

Jim Rogers, author and co-founder of the Quantum Fund: "Academic studies have shown repeatedly that most people do not beat the market over any long period of time."

Allan Roth, author and financial columnist for AARP: "My advice is to own the market rather than try to outsmart it."

Ron Ross, author of The Unbeatable Market: "Giving up the futile pursuit of beating the market is the surest way to increase your investment efficiency and enhance your financial peace of mind."

Paul Samuelson, Nobel Laureate: "The most efficient way to diversify a stock portfolio is with a low-fee index fund. Statistically, a broadly based stock index fund will outperform most actively managed equity portfolios."

Charles Schwab: "Only about one out of every four equity funds outperforms the stock market. That's why I'm a firm believer in the power of indexing."

Wm. Sharpe, Nobel Laureate: "It pays to be very skeptical indeed of schemes that purport to be able to “beat the market”.

Jeremy Siegel, author of Stocks for the Long Run: "For most of us, trying to beat the market leads to disastrous results."

Ben Stein, author and economist: "Scholarly work by Burton Malkiel, Eugene Fama and others has proved that it is the rare investor indeed who can outperform the overall market."\

Stein & DeMuth, authors of Yes, You Can Get A Financial Life!: "Buying and holding a few broad market index funds is perhaps the most important move ordinary investors can make to supercharge their portfolios."

"Robert Stovall, investment manager: It's just not true that you can't beat the market. Every year about one-third do it. Of course, each year it is a different group."

David Swensen, Yale's Chief Investment Officer at Yale University and author of "Unconventional Success": "The fact remains that long odds face the investor who hopes to beat the market."

Richard Thaler, 2015 President of the American Economic Association: "It is not easy to beat the market, and most people don't."

Walter Updegrave, Editor of Real Deal Retirement: "If you stick to broadly diversified stock and bond index funds, you can avoid the whole fund-picking racket, and fare much better than investors who are constantly seeking out hot funds."

Garland Whizzer: "Financial graveyards are getting more and more full of those who try unsuccessfully to beat the market."
Best wishes.
Taylor
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Re: How to Underperform the Market

Post by Dude2 » Sat Aug 18, 2018 11:13 am

There are many roads that don't lead to Dublin.
(couldn't resist)

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Re: How to Underperform the Market

Post by DWesterb2iz2 » Sat Aug 18, 2018 11:29 am

Good podcast about avoiding investments that rely on predicting the future, because “The future is unknowable.” You’ll hear this a lot in the link below.

It’s actually Todd Tresidder reading a chapter he wrote for the new Meb Faber anthology, and he reads it very very quickly. Somehow the speed of the reading helps drive his point home. Good podcast.

http://mebfaber.com/2018/08/13/bonus-ep ... ting-hoax/

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Re: How to Underperform the Market

Post by Fallible » Sat Aug 18, 2018 1:52 pm

SelfEmployed123 wrote:
Sat Aug 18, 2018 9:57 am
Fallible wrote:
Fri Aug 17, 2018 7:55 pm
SelfEmployed123 wrote:
Fri Aug 17, 2018 2:38 pm
Fallible wrote:
Fri Aug 17, 2018 1:35 pm
SelfEmployed123 wrote:
Fri Aug 17, 2018 6:07 am
...
I think cognitive biases are not the same as falling prey to your emotions. Emotions can lead to faulty thinking, but sometimes your thinking is contaminated by its own faulty logic and emotion has nothing to do with it. ...
What are examples of where cognitive (faulty thinking) is not affected by, or the result of, emotions?
There's definitely an interaction between the two, but emotions are not the only cause of faulty thinking. Faulty logic can lead to all kinds of bad decisions without being caused by strong emotions. . This article has a bit more: https://www.investopedia.com/articles/i ... esting.asp
These emotional/cognitive categories (also in the BH wiki under "Behavioral Pitfalls") don't necessarily preclude a connection. From research by Kahneman and Tversky and many others, it appears that emotions, which are known to be largely unconscious, may lurk in some form and to various degrees in most and possibly all cognitive biases, in all thinking. The relatively new field of brain imaging is helping to show how and where that happens. Fascinating stuff.
Kahneman and Tversky have written a lot about heuristics and biases. Their research points to this idea that we have two decision making systems: system 1 (rational) and system 2 (intuitive). Rational decision making is laborious and uses logic. Intuitive decision making is largely unconscious and is quick due to its use of mental shortcuts (heuristics). Kahneman and Tversky's research shows us the many ways our intuition can lead us astray. I think when most people on this forum refer to emotions, they are referring to intuition.
Yes, I’ve seen those forum references. Yet emotions are not all bad and neither is intuition. Kahneman has written about “expert intuition” that can require much experience, often many years in one field, to make extremely fast, but correct decisions. So the intuition of System 1 does not always lead to poor decisions.
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Re: How to Underperform the Market

Post by harmoniousmonk » Sat Aug 18, 2018 3:17 pm

DWesterb2iz2 wrote:
Sat Aug 18, 2018 11:29 am
Good podcast about avoiding investments that rely on predicting the future, because “The future is unknowable.” You’ll hear this a lot in the link below.

It’s actually Todd Tresidder reading a chapter he wrote for the new Meb Faber anthology, and he reads it very very quickly. Somehow the speed of the reading helps drive his point home. Good podcast.

http://mebfaber.com/2018/08/13/bonus-ep ... ting-hoax/
Good podcast. Thanks for sharing. The repetition helped drive home the point.
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Re: How to Underperform the Market

Post by abuss368 » Sat Aug 18, 2018 7:45 pm

Cartographer wrote:
Thu Aug 16, 2018 3:11 pm
I've been reading articles about how the average investor underperforms the market.

The claims usual cite the Dalbar study, and suggest that the average investor loses because their emotions cause them to buy high and sell low, or something to that effect. However, the Dalbar study has been criticized for comparing apples to oranges. Moreover, there's the obvious argument that all investors, over any time period, on average must have the the same return as the overall market (before costs) over that time period. Therefore, if investors are able to consistently lose to the market (by being emotional or by any other reason), then there should be a mirror strategy that consistently beats the market, simply by doing the opposite. But experience tells us that its extremely hard, if not impossible, to consistently beat the market.

At the same time, average investors underperforming jives with my own observations of family members and others, who have consistently trailed the market over long stretches of time, even if you ignore costs.

This post is therefore my attempt at coming up with possible explanations for why an individual investor can consistently lose to the market, with there being no corresponding winning strategy. I am only interested in ways to lose before costs, since paying ridiculous fees is of course a way to lose to the market. Any such losing strategy must exploit some inherent asymmetry in investing or the market. I don't claim any of the below "strategies" are novel nor that they haven't been discussed many times on the forum.



1. Time out of the market. This one's simple. If the average investor pulls out of the market due to fear of a crash, their returns will be reduced (in expectation) since the market usually goes up. There's not really an mirror strategy to being under-exposed to the market, unless you resort to leverage.


2. Missing out on the "free lunch" of diversification. While in aggregate, investor returns must match market returns, this is only true if we look at total returns for that period. If instead we look at returns over a large period, say 10 years, and we compute the average annualized return of investors (I thin the Dalbar study does this), and compare it to the annualized return of the market, it actually can be the case that the investor loses to the market. This is similar to the fact that the geometric mean can be lower than the arithmetic mean.

To illustrate: consider a market consisting of two stocks A and B, which start out in equal proportion. A returns 1% per year for 10 years, and B returns 10$ a year for 10 years. In aggregate, the market will return about 85% over the 10 year period, which is annualized to about 6.3%.

Now, suppose the market is owned by just 2 investors, 1 and 2. 1 owns all of A, and 2 owns all of B. The average 10 year return of 1 and 2 is similarly 85%. However, if we look at annualized returns, 1 has 1% and 2 has 10%, so the average annualized returns of the investors is 5.5%. Therefore, on an annualized basis, the average individual investor actually underperformed the market.

Therefore, a simple strategy to underperform the market on an annualized basis is simply to under-diversify, increasing the variance in your outcomes. More generally, any strategy that increases your variance without increasing returns will work. I'm sure various financial derivatives would be useful for this. Of course, there is some small chance you will happen to choose the winners and beat the market. But in expectation, your annualized returns will trail the market. As far as I can tell, there's no mirror strategy (how can you be more diversified than the market?)


3. Doubling down on stocks as they go to 0. Stocks can go to 0, but they cannot go to infinity. And yet, in order to make up for losing all your investment, you would need an infinite return on your next investment.

So here's how we can exploit this to lose to the market: start with an equal percentage in each of several companies, and then occasionally rebalance to maintain that percentage. If even a single company goes to 0, you'll end up rebalancing yourself all the way to zero. Since none of your investments will ever have infinite returns, you'll stay at 0 forever, clearly losing to the market.

Even worse (and what I've seen happen) is when one company goes down, you could employ the "it cannot possibly go any lower" mentality, and buy even more than rebalancing would require. You'll reach 0 that much faster.

Again, I don't think there's a mirror strategy, as such a strategy would require a stock to go to infinity.



Can anyone come up with other strategies to lose to the market?
For us it is simple. Many years ago we traded individual stocks thinking we were smarter than the market. We found out otherwise.
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Re: How to Underperform the Market

Post by deikel » Sat Aug 18, 2018 9:02 pm

Cartographer wrote:
Thu Aug 16, 2018 4:11 pm
Carol88888 wrote:
Thu Aug 16, 2018 4:00 pm
One thing that I have noticed in my own experience from buying individual stocks is that sometimes one can be absolutely correct in the pick of a security and yet sell it too soon to repeap the whole benefit. It's devilishly hard knowing when to take profits.

Also, hard is having the discipline to cut losses short.

So the individual investor jumps around too much, trading too much, and paying taxes too frequently and ends up underperforming.

But I do believe there is a class of investor that just buys and hold individual stocks that does outperform. They outperform by pre-selecting stocks from a list of quality issues (say S&P financial ratings) and then just sit on them for decades. This, too, is devilishly hard to do but it can be done by the very few with great patience who have decades of time ahead of them and the grit to hold on when the market collapses.
But the claims are often that the average investor trails the market by a significant margin. Even if a select few can beat the market over the long run by a small amount, this is not enough to offset the bulk of investors supposedly losing by a lot.
I am not sure I understand the underlying problem. You seem to assume that it has to be a zero sum game where whatever is lost someone else must recoup ? But we are not talking about buying and selling in a short moment in time (the market pricing an asset), but stretched over a time period. As they say on TV, x amount of value has been destroyed in the recent market downturn ....so that money is gone and investors who sold actually realize the losses, whereas others that hold just realize 'non-gains' in that time perid and buyers can realize future gains (anew) if they start buying and the cycle continues. But whoever sells, realizes the loss and the game is negative at that point in time.
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Re: How to Underperform the Market

Post by deikel » Sat Aug 18, 2018 9:05 pm

The easiest way to underperform the market is to diversify in stocks and bonds rather than to stay 100% in stocks - that almost guarantees you will underperform the market - assuming the market is an all stock asset allocation and you invest long enough to get to statistical behavior.

I could not resist.
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Re: How to Underperform the Market

Post by SelfEmployed123 » Sun Aug 19, 2018 6:49 am

Fallible wrote:
Sat Aug 18, 2018 1:52 pm
Kahneman has written about “expert intuition” that can require much experience, often many years in one field, to make extremely fast, but correct decisions. So the intuition of System 1 does not always lead to poor decisions.
This is true, but I don't think investing is a domain where expert intuition exists. A firefighter may walk into a burning building and use expert intuition to search the home successfully. However, an investor using their expert intuition when making sell or buy decisions is likely to lose their shirt in the long run.
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Re: How to Underperform the Market

Post by Dude2 » Sun Aug 19, 2018 10:32 am

Dude2 wrote:
Fri Aug 17, 2018 10:14 pm
Yes, sorry Taylor, I was getting a little philosophical there and not practical. If we define the market as the reference frame and we cling to it for dear life, then by definition we cannot lose. The market itself can go up and down, but if nobody can consistently beat it over time, there is no better place to be. Therefore, any deviation from it is a guaranteed loss. Yes, this is not practical, but if we define the reference frame as such it must be true.
In an effort make my statements above more correct, here is a quote from a Forbes article.
Over any finite period of time, looking backwards, there always will have been better portfolios to have owned. The problem is, we can't tell which ones they will be in advance. The carrot that the Global Market Portfolio dangles is the highest expected return for the least expected risk on a forward-looking basis. Realized risks and returns will be different. When it comes to strategy vs. outcome, we only control the former.

Fallible
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Re: How to Underperform the Market

Post by Fallible » Sun Aug 19, 2018 11:05 am

SelfEmployed123 wrote:
Sun Aug 19, 2018 6:49 am
Fallible wrote:
Sat Aug 18, 2018 1:52 pm
Kahneman has written about “expert intuition” that can require much experience, often many years in one field, to make extremely fast, but correct decisions. So the intuition of System 1 does not always lead to poor decisions.
This is true, but I don't think investing is a domain where expert intuition exists. A firefighter may walk into a burning building and use expert intuition to search the home successfully. However, an investor using their expert intuition when making sell or buy decisions is likely to lose their shirt in the long run.
One wouldn't think so, but if it's true expert intuition, especially used along with the slower, logical system 2, it should be invaluable in making sound investment decisions. The key word is "expert," especially as Kahneman defines it.
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