> picking stocks yourself, the answer is also pretty cut and dry. There’s strong evidence no individual trader can expect to beat the market.
Is there? It would make sense if an average individual trader can't expect to beat the market. Claiming that there are no individual investors who did/can do that over a reasonably long period is both objectively false and rather absurd.
Read the GP carefully.Expect to beat is very different than beat. You don't expect to beat the casino in roulette, but some people will luck out. That doesn't mean they could expect to win in advance: They should expect a small loss, depending on the table, and be surprised when luck smiles upon them.
> You don't expect to beat the casino in roulette,
Do you believe that investment is entirely random and there is absolutely no skill involved?
Because if not, that's a nonsensical analogy. You should use a a both both luck and skill based game like poker (probably not the casino variety, though) etc.
Otherwise if you can reasonably expect to beat 50% of all "players" (of course it takes much more time to verify that in the market) then you can expect to make more than the average.
The problem is that any active trading strategies now need to beat the market by the cost of a fund manger, the cost of their research, the cost of regular trades, and the cost of short-term capital gains taxes on those trades.
These add up significantly. Instead of having to beat the market at all, you have to beat it by an extra half of a percent or more every year. And you have to do it year after year after year.
All the evidence shows that actively-managed funds are a weighted (against you) coin flip. Less than half will beat the market in a given year. And the results from any given year are independent of the next.
Yeah managed funds sucks big times. They rip people off with fees, quite some have insane performance fees and they just don't beat the market.
Then I suspect that even with all the supervision in place, quite some manage to also do Hollywood accounting.
Not to mention the friend of the cousin of the fund manager's niece who happened to buy x shares of y or options before, shocker, the fund invested in y.
We know these people cheat. If they were so good they wouldn't need to leech on fees.
I live in a tiny country where lots of fund are managed (only second to the US). I know the drill. Most of them by very far are about suckering people's money in, no matter what the fund is about.
Creat 16 funds, after four years show the prospectus of the one fund that performed best. Rinse and repeat.
Actively managed funds are a scam.
Also depending on where you buy it, anywhere from zero (good) to 1% entrance and exit fees.
> Do you believe that investment is entirely random and there is absolutely no skill involved?
The skill involved is more just "best practices" that let you match the market: Buy-and-hold, diversify, basically, do what the index funds do and you will be roughly +0 to the market. Beyond that, it's a totally random distribution that adds between -X and +X which allows some participants to beat the market and causes some to underperform. You can't tell beforehand which participants will beat the market, even having full knowledge of their strategies and skill. If you think you can, please tell me which active funds will beat the market in the next 10 years based on their skills. I'll invest in them.
> You can't tell beforehand which participants will beat the market, even having full knowledge of their strategies and skill
I never implied that I can. That fact doesn't prove that it's somehow fundamentally impossible to do that. The problem is that it's impossible to tell if you "strategy" is working until a significant amount of time passes and by that point the markets conditions might have changed to such an extent that you don't longer have an edge (add to that the fact that it's hardly possible to determine what part of your success was luck/skill). So there is always a huge amount of uncertainty.
Albeit if we look back by ~10-15 years it's rather obvious that it was possible to beat the market by a very significant e.g. there were clear rational reasons to believe that Nvidia would do better than its competitors like AMD or Intel and that there would be significant growth in GPU compute/ML/AI (of course accurately estimating the extent and exact timing but that wasn't necessary at all to get above market return) same applies to many companies in adjacent and unrelated sectors. Was I or the overwhelming majority of investors capable of realizing that and more importantly acting on it? Certainly not. But looking back it obviously wasn't random.
The efficient-market hypothesis is clearly false, at least in the short to medium term. That in no way means that most investors are even remotely capable of utilizing this fact.
It must have been nice in the early 2010s to be so smart to predict AI would be a huge hit (after a couple previous AI winters) and that GPUs would be the key and that NVIDIA specifically would reap the benefits. But I'm sure you're smarter than me and a lot of other people. And AMD also did pretty well during much of that same period although I sadly sold my modest holdings after they went nowhere for years after spiking with some adoption by the big server makers. It would probably have made more sense to bet on Intel during that period.
Exactly. The point is that the only way you can know that a particular "strategy" was market-beating is by looking back after the fact. Just like you can only know who is a good coin flipper after running 10 trials and looking back at who flipped heads 10 times. And the strategies will be similarly repeatable.
We expect some individual traders to beat the market (and some to do much worse than the marker); that's variance. But each individual trader should not expect to beat the market, because they don't know if they're one of the lucky ones.
> But each individual trader should not expect to beat the market
In aggregate sure. But unless we believe that it's entirely random some individual investors can still certainly expect to beat the market, they just can't verify that in advance.
I offer you a bet. We flip a perfectly fair coin. On every heads you gain 10% on top of your bet. On every tails you lose 10%.
It is fair to say that after 100 flips you may profit. If one million people play this game, someone almost certainly will. But you can expect to lose money on this game. By the end, the average person will have about 60% of their original holdings (0.9^50 * 1.1^50).
In this game it’s possible for winners to exist. It’s not even uncommon! You only have to get at least 53 out of 100 flips as heads. Unfortunately there’s also no function that lets you determine a winner in advance, and the longer you play this game the greater the expected loss.
All of the available evidence shows that publicly-available actively-managed funds are essentially playing this game. As expected, many have incredible winning streaks… right until they don’t.
Yes, Ren Tech’s Medallion Fund exists. But you can’t contribute to it; they don’t want your money. Because that requires scaling market inefficiencies and that in and of itself is an intractable problem. Novel strategies ripe for profit don’t have unlimited capacity. They rapidly exhaust alpha.
That’s not what “expect” means in statistics. If we’re rolling 100-sided dice (each person rolls once), no person should expect to roll a 1, even though 1% of people will in practice roll a 1. Likewise, no one should expect to beat the market, even though many will in practice.
> Likewise, no one should expect to beat the market, even though many will in practice.
My only point is only that not every investor is rolling the same dice. It's just that it is effectively impossible to every verify whether you were rolling a 90-sided dice or a 100-sided one. It's rather clear that at least in the short to medium term (e.g 2-3 years) the stock is not even remotely perfectly efficient (that doesn't mean that the overwhelming majority of investors are somehow capable of utilizing that fact or that a significant proportion of those that did seemingly manage to do that weren't just lucky)
Is there? It would make sense if an average individual trader can't expect to beat the market. Claiming that there are no individual investors who did/can do that over a reasonably long period is both objectively false and rather absurd.