It is impossible to beat the market
I have spent years providing investment ideas to the most sophisticated hedge fund investors. Prior to starting worked at J.P. Morgan Asset Management as a global strategist where I was on committees that decided what growth and inflation assumptions should be used in our U.S and Emerging Market portfolios. Roughly $300 billion in assets at stake.
I can categorically tell you it is not only difficult for the average person to “beat” the market consistently… it is nearly impossible.
Let’s first assume that you are average. Meaning you dabble here and there and spend 3–4 hours a week doing serious research on the markets. As the below chart from Dalbar and J.P. Morgan shows, the average investor has underperformed basically every asset class over the last 20 years. They underperformed the S&P 500 by over 5% on an annualized basis.
A professional investor spends roughly 50–60 hours a week focused on understanding companies businesses, geopolitics, and the overall macro picture. Most of them, over the long run, also fail to beat the market (as explained in this WSJ article).
Great professional investors spend 70–100 hours laser-focused on the markets. They are great lateral thinkers. While you are thinking about what show to watch tonight, they are reading white papers on the newest quantitative models that might give them a slight edge. They are speaking to CEOs at large companies over dinner to try to understand what’s happening at the ground level. While you take your kids to soccer practice, they are running models on the relationship of oil to the US dollar, accounting for secondary factors like global growth and inflation. They all have a framework that they have developed and refined over many years. They all have an insane focus on risk management and are students of behavioral biases. These investors might beat the market consistently, but they are only right 55%-60% of the time.
The best in the world will be 60–65% right on their picks. Think about that. The best in the world, I am talking Warren Buffet, Ray Dalio level, get it wrong 35–40% of the time.
So no, even though Kramer will make it look easy on CNBC, being a consistently great active investor is extremely difficult. You might get lucky here and there, but most likely you will be giving away those short-term gains to commissions you are paying to trade. There is a reason brokerage houses don’t send you a statement that makes it clear how much you were up for the year AFTER accounting for the trading fees you paid.
The majority of people should invest in passive ETFs that track the overall market. It’s not only my advice, Buffett () thinks so as well.
This blog post was originally posted as an answer to the question: Is it hard to make money in the stock market? on Quora.com.
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*All investing is subject to risk, including the possible loss of the money you invest. **The projections or other information generated by Zoe Financial, Inc. regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.