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You will never, ever beat the market by making smart trades. Get real- you're a beginner reading investopedia. Active funds employ hundreds or thousands of peo

You will never, ever beat the market by making smart trades. Get real- you're a beginner reading investopedia. Active funds employ hundreds or thousands of people who work more than full-time to support an operation of systematically studying investment opportunities and exploiting inside information to beat the market, and even they don't beat the market. Put your money in a diversified portfolio of index funds and leave it alone. Making targeted trades costs money and will do no better than index funds anyway.

dominotw 11y ago
Why does an investor have to beat the market. If the companies you invested in are getting richer and making useful products, investors should get rich too. Its not zero sum.
- brianpgordon 11y ago
  That's what you're trying to do by poring over investment books and investopedia. Anyone can track the market by buying the S&P 500 or an index fund. All of the complicated investment advice comes when you try to do better than the index.
dwc 11y ago
Agreed, with one exception: when you as an individual have fairly deep knowledge about something and spot a market opportunity based on that knowledge, you might be able to correctly judge whether you can take advantage of it. I've done this several times and made good money. Two times I approximately doubled my money over the course of several months. Yeah, not day trading but buying and waiting for the market to figure out what I already knew. The thing about that is, it only happens when it happens. Most of the time my money is sitting in index funds quietly getting solid but undramatic returns, and I don't have to pay much attention at all.
- philjr 11y ago
  I agree with this, once you are aware (or think of) what you're doing as closer to gambling than "investing" ie. use money you're prepared to lose as opposed to the kids college fund
- brianpgordon 11y ago
  I admit that's a possibility, but be very careful and very limited in your domain. Stupid shit is wildly successful all of the time, and brilliant offerings fail all of the time. The market still hasn't figured out that SharePoint sucks and enterprise lock-in from vendors like Oracle is predatory and bad for business. Amazing achievements like NeXT and the Amiga never made money. Gimmicks like the Amazon Echo and the Apple Watch ship millions of units. It's really hard to tell what the market will do.
  - dandelany 11y ago
    Or as Keynes put it, "The market can stay irrational longer than you can stay solvent."
  - dwc 11y ago
    I'm as bad at those kind of picks as the next person. I wasted time and money figuring that out, though. The only time I buy in is when the market overreacts to some bit of bad news or something and I see the undervaluation. Of a strong, established company.
  - lazyhummingbird 11y ago
    > Gimmicks like the Amazon Echo Ah, the first mass-market ambient computer is a gimmick. And somehow I still want one.
- bbcbasic 11y ago
  I own shares given to me in a company I used to work for that has now floated. I am keeping the shares, which is effectively a pick but I know it is well run and very good at executing value acquisitions
  - aws_ls 11y ago
    If those shares are a small percentage of the net worth, then it can be Okay to keep them as is. But if its the case of them being the majority of your net worth, then its very dangerous. I look at it from a downside vs upside perspective. I want a lower probability of a downside, which will cause pain to me. For that I am okay, to trade it with moderate upside e.g. index based funds.
baccredited 11y ago
>You will never, ever beat the market by making smart trades. Agree. Just buy ticker VOO and get on with your life. Even Warren Buffet has said to buy 90% VOO and 10% bonds. And you will never be as good at this as Warren Buffett. That said, I take 10% of my net worth and put it in a 'casino fund' where I can buy whatever I want. Startups, peer to peer nonsense, individual stocks, and so on.
- brianpgordon 11y ago
  VOO isn't exposed to international developed and emerging markets. If you have the appetite for risk, you may want to take significant positions in VEA and VWO.
  - baccredited 11y ago
    Point taken. But most big S&P 500 companies are heavily international. Look at Apple's last quarter: 'International sales accounted for 66 percent of the quarter’s revenue.'
- log0 11y ago
  Curious question to all you investment experts. The SPY/VOO guys did not improve since 2015 and even now. Proponents of the SPY/VOO are based on the 2008... which has been rising until 2015. So how is investing into index fund ETFs still relevant today? Just earn on dividends?
pilom 11y ago
Well, you might do better trading for short periods of time, but you probably won't beat stock index funds over a 25+ year period.
dsacco 11y ago
You're making a lot of absolute statements that are demonstrably false. >> You will never, ever beat the market by making smart trades. How do you define "smart" trades? There are people and firms which consistently beat the S&P 500 after fees and trade commissions on a timeline of 20+ years without using insider trading. What would this be called, other than "smart" trading? >> Active funds employ hundreds or thousands of people who work more than full-time to support an operation of systematically studying investment opportunities and exploiting inside information to beat the market, and even they don't beat the market. Most do not, but the fact that most peoples' companies don't IPO doesn't mean it's impossible. Firms like RenTec consistently beat the market, and they have less than 300 employees total. >> Making targeted trades costs money and will do no better than index funds anyway. I agree with advice advocating index funds for beginners, but it's not fair to an individual's potential aspirations to claim that active trading is simply ineffective. It's extremely difficult, but that's wildly different from being ineffective.
- the_gastropod 11y ago
  >There are people and firms which consistently beat the S&P 500 after fees and trade commissions on a timeline of 20+ years without using insider trading. What would this be called, other than "smart" trading? Mind naming a few? I'm unfamiliar with any firms that consistently can beat the S&P 500, much less for 20+ consecutive years. This could, of course, be called "luck". Given the number of investors, some will inevitably beat the index. The point is that it's impossible to predict, ahead of time, who that will be. > I agree with advice advocating index funds for beginners, but it's not fair to an individual's potential aspirations to claim that active trading is simply ineffective. It's extremely difficult, but that's wildly different from being ineffective. Again, even amongst professional investors, who have decades of experience, and spend 80+ hours per week doing this, very few are able to consistently beat the index.
  - dharmon 11y ago
    Off the top of my head: Baupost Group (Seth Klarman), Greenlight (David Einhorn), Gotham (Howard Marks), Renaissance (Jim Simons), Oaktree (Joel Greenblatt), Graham & Newman (Benjamin Graham), Magellan (Peter Lynch), Pabrai (Mohnish Pabrai), ... Most of these are closed and closely held. Keeping your capital base small with long-term-minded investors (e.g., "family" money) is a huge leg up.
acconrad 11y ago
But you can beat the market by doing a few things: 1. Invest, don't trade. That means buying companies in large quantities when they're at a bargain, and holding for a long time (think years or even decades). This will keep your costs and commissions down. 2. Look where others won't. As Ben Graham and Seth Klarman have pointed out in their books, you want to look for companies that no one else is looking at for a variety of reasons: * They've hit rock bottom in the last 1/3/5 years. If people are selling, you should look at buying. * They're special situations. Is the stock going through the process of bankruptcy, merger/acquisition, spin-off? This is the basis for books like Margin of Safety and You Can Be a Stock Market Genius. * They're complicated. Distressed debt, credit-default swaps, and other alternative investments to access by the public can be profitable if one is willing to put in the time (years) and dedication to analysis, but I generally wouldn't recommend it * They don't fit the fund's portfolio / low institutional ownership. Active funds may employ thousands of people to work full-time on investments that suit their fund. This generally means large cap companies because the funds have to utilize so much capital that they can't waste it on institutional ownership of small and micro cap companies. Everyone and their mom has done research analysis on Google, few spend their time on Sanderson Farms, which only broke into mid-cap territory for the first time in over a year, and has since risen by over 10% after being massively undervalued. If you are in a diversified basket of 15-30 value-oriented stocks with at least some focus on quality, you can stand to beat the market over the very long term.
- wdr1 11y ago
  Any support evidence?
  - Spooky23 11y ago
    I've been investing like this since high school and that portfolio consistently beats the performance of the Boglehead style 401k & 457 plans that I am stuck with from my employers. I use a narrower field of 5-8 companies, a reasonable cash portfolio and occasionally municipal bonds. It's like anything else, if you are motivated, it's quite possible to find undervalued assets with good potential.
  - 11y ago
jamez1 11y ago
There's a lot of folklore about how active funds consistently under perform passive funds, but that's only in aggregate. If you aggregate a few active funds they will be a good proxy for the index, which after fees, will have less returns than buying the index. There is dependence in active fund returns, a good fund will consistently be a good fund, and a bad fund will consistently be a bad. You also have selection bias, because the best funds do not tell the public they exist, while the worst prey on public money to exist. From the public's point of view, of course active funds are all bad. From those in active fund management we gain nothing from correcting them. Journalists don't care for the truth and we don't care for their falsehoods.
- JamesBarney 11y ago
  If this was said of companies people could say "Don't buy an index. That's just an average of good companies and bad companies. Instead just buy good companies they will consistently outperform the index." The problem is in the details. Identifying good companies is very very hard. Identifying good funds is much much harder. By the time there is a large amount of evidence that a fund is a good fund it is either A. closed to new funds or B. Drowning in so much cash that there is no hope of delivering it's historical returns.(its much easier to return 12% on 10 million than 10 billion)
JamesBarney 11y ago
One thing to note is that even if you are one of the few who has a gift for investing, you need to be investing a lot of money to break even. Assume 1. it takes an extra 500 hours a year to research and buy good investments. 2. you make $60 an hour 3. all your hard work delivers a respectable alpha of 3%(3% better returns than than the market) You need to be investing approximately 1 million dollars to break even.
- potatosareok 11y ago
  I don't understand this at all. In what world is there an infinite amount of hours I can work? Most people work 40 hours a week and if they work more don't get paid extra (barring overtime but do you work somewhere where you can just work 100 hours a week and put in 60 hours of overtime because you felt like it?). Between weekends and just general downtime in week (I spend time watching netflix and browsing the internet and I read books in my commute) I have at least 30 hours free a week. If you're into stocks as much as I'm into wasting time entertaining myself then why not.
js4 11y ago
Don't listen to this. You can beat the market --there are plenty of people that do. The thing about investing is that it takes experience and you unfortunately only get that by investing. One thing you don't want to do is trade. You want to act like an owner. That means find companies and get involved for the long term. Also remember there is no free money out there. Investing takes a lot of work and often times doesn't pay off for years.

dominotw 11y ago

Why does an investor have to beat the market. If the companies you invested in are getting richer and making useful products, investors should get rich too. Its not zero sum.

brianpgordon 11y ago
That's what you're trying to do by poring over investment books and investopedia. Anyone can track the market by buying the S&P 500 or an index fund. All of the complicated investment advice comes when you try to do better than the index.

dwc 11y ago

Agreed, with one exception: when you as an individual have fairly deep knowledge about something and spot a market opportunity based on that knowledge, you might be able to correctly judge whether you can take advantage of it. I've done this several times and made good money. Two times I approximately doubled my money over the course of several months. Yeah, not day trading but buying and waiting for the market to figure out what I already knew. The thing about that is, it only happens when it happens. Most of the time my money is sitting in index funds quietly getting solid but undramatic returns, and I don't have to pay much attention at all.

philjr 11y ago
I agree with this, once you are aware (or think of) what you're doing as closer to gambling than "investing" ie. use money you're prepared to lose as opposed to the kids college fund
brianpgordon 11y ago
I admit that's a possibility, but be very careful and very limited in your domain. Stupid shit is wildly successful all of the time, and brilliant offerings fail all of the time. The market still hasn't figured out that SharePoint sucks and enterprise lock-in from vendors like Oracle is predatory and bad for business. Amazing achievements like NeXT and the Amiga never made money. Gimmicks like the Amazon Echo and the Apple Watch ship millions of units. It's really hard to tell what the market will do.
- dandelany 11y ago
  Or as Keynes put it, "The market can stay irrational longer than you can stay solvent."
- dwc 11y ago
  I'm as bad at those kind of picks as the next person. I wasted time and money figuring that out, though. The only time I buy in is when the market overreacts to some bit of bad news or something and I see the undervaluation. Of a strong, established company.
- lazyhummingbird 11y ago
  > Gimmicks like the Amazon Echo Ah, the first mass-market ambient computer is a gimmick. And somehow I still want one.
bbcbasic 11y ago
I own shares given to me in a company I used to work for that has now floated. I am keeping the shares, which is effectively a pick but I know it is well run and very good at executing value acquisitions
- aws_ls 11y ago
  If those shares are a small percentage of the net worth, then it can be Okay to keep them as is. But if its the case of them being the majority of your net worth, then its very dangerous. I look at it from a downside vs upside perspective. I want a lower probability of a downside, which will cause pain to me. For that I am okay, to trade it with moderate upside e.g. index based funds.

baccredited 11y ago

>You will never, ever beat the market by making smart trades. Agree. Just buy ticker VOO and get on with your life. Even Warren Buffet has said to buy 90% VOO and 10% bonds. And you will never be as good at this as Warren Buffett. That said, I take 10% of my net worth and put it in a 'casino fund' where I can buy whatever I want. Startups, peer to peer nonsense, individual stocks, and so on.

brianpgordon 11y ago
VOO isn't exposed to international developed and emerging markets. If you have the appetite for risk, you may want to take significant positions in VEA and VWO.
- baccredited 11y ago
  Point taken. But most big S&P 500 companies are heavily international. Look at Apple's last quarter: 'International sales accounted for 66 percent of the quarter’s revenue.'
log0 11y ago
Curious question to all you investment experts. The SPY/VOO guys did not improve since 2015 and even now. Proponents of the SPY/VOO are based on the 2008... which has been rising until 2015. So how is investing into index fund ETFs still relevant today? Just earn on dividends?

pilom 11y ago

Well, you might do better trading for short periods of time, but you probably won't beat stock index funds over a 25+ year period.

dsacco 11y ago

You're making a lot of absolute statements that are demonstrably false. >> You will never, ever beat the market by making smart trades. How do you define "smart" trades? There are people and firms which consistently beat the S&P 500 after fees and trade commissions on a timeline of 20+ years without using insider trading. What would this be called, other than "smart" trading? >> Active funds employ hundreds or thousands of people who work more than full-time to support an operation of systematically studying investment opportunities and exploiting inside information to beat the market, and even they don't beat the market. Most do not, but the fact that most peoples' companies don't IPO doesn't mean it's impossible. Firms like RenTec consistently beat the market, and they have less than 300 employees total. >> Making targeted trades costs money and will do no better than index funds anyway. I agree with advice advocating index funds for beginners, but it's not fair to an individual's potential aspirations to claim that active trading is simply ineffective. It's extremely difficult, but that's wildly different from being ineffective.

the_gastropod 11y ago
>There are people and firms which consistently beat the S&P 500 after fees and trade commissions on a timeline of 20+ years without using insider trading. What would this be called, other than "smart" trading? Mind naming a few? I'm unfamiliar with any firms that consistently can beat the S&P 500, much less for 20+ consecutive years. This could, of course, be called "luck". Given the number of investors, some will inevitably beat the index. The point is that it's impossible to predict, ahead of time, who that will be. > I agree with advice advocating index funds for beginners, but it's not fair to an individual's potential aspirations to claim that active trading is simply ineffective. It's extremely difficult, but that's wildly different from being ineffective. Again, even amongst professional investors, who have decades of experience, and spend 80+ hours per week doing this, very few are able to consistently beat the index.
- dharmon 11y ago
  Off the top of my head: Baupost Group (Seth Klarman), Greenlight (David Einhorn), Gotham (Howard Marks), Renaissance (Jim Simons), Oaktree (Joel Greenblatt), Graham & Newman (Benjamin Graham), Magellan (Peter Lynch), Pabrai (Mohnish Pabrai), ... Most of these are closed and closely held. Keeping your capital base small with long-term-minded investors (e.g., "family" money) is a huge leg up.

acconrad 11y ago

But you can beat the market by doing a few things: 1. Invest, don't trade. That means buying companies in large quantities when they're at a bargain, and holding for a long time (think years or even decades). This will keep your costs and commissions down. 2. Look where others won't. As Ben Graham and Seth Klarman have pointed out in their books, you want to look for companies that no one else is looking at for a variety of reasons: * They've hit rock bottom in the last 1/3/5 years. If people are selling, you should look at buying. * They're special situations. Is the stock going through the process of bankruptcy, merger/acquisition, spin-off? This is the basis for books like Margin of Safety and You Can Be a Stock Market Genius. * They're complicated. Distressed debt, credit-default swaps, and other alternative investments to access by the public can be profitable if one is willing to put in the time (years) and dedication to analysis, but I generally wouldn't recommend it * They don't fit the fund's portfolio / low institutional ownership. Active funds may employ thousands of people to work full-time on investments that suit their fund. This generally means large cap companies because the funds have to utilize so much capital that they can't waste it on institutional ownership of small and micro cap companies. Everyone and their mom has done research analysis on Google, few spend their time on Sanderson Farms, which only broke into mid-cap territory for the first time in over a year, and has since risen by over 10% after being massively undervalued. If you are in a diversified basket of 15-30 value-oriented stocks with at least some focus on quality, you can stand to beat the market over the very long term.

wdr1 11y ago
Any support evidence?
- Spooky23 11y ago
  I've been investing like this since high school and that portfolio consistently beats the performance of the Boglehead style 401k & 457 plans that I am stuck with from my employers. I use a narrower field of 5-8 companies, a reasonable cash portfolio and occasionally municipal bonds. It's like anything else, if you are motivated, it's quite possible to find undervalued assets with good potential.
- 11y ago

jamez1 11y ago

There's a lot of folklore about how active funds consistently under perform passive funds, but that's only in aggregate. If you aggregate a few active funds they will be a good proxy for the index, which after fees, will have less returns than buying the index. There is dependence in active fund returns, a good fund will consistently be a good fund, and a bad fund will consistently be a bad. You also have selection bias, because the best funds do not tell the public they exist, while the worst prey on public money to exist. From the public's point of view, of course active funds are all bad. From those in active fund management we gain nothing from correcting them. Journalists don't care for the truth and we don't care for their falsehoods.

JamesBarney 11y ago
If this was said of companies people could say "Don't buy an index. That's just an average of good companies and bad companies. Instead just buy good companies they will consistently outperform the index." The problem is in the details. Identifying good companies is very very hard. Identifying good funds is much much harder. By the time there is a large amount of evidence that a fund is a good fund it is either A. closed to new funds or B. Drowning in so much cash that there is no hope of delivering it's historical returns.(its much easier to return 12% on 10 million than 10 billion)

JamesBarney 11y ago

One thing to note is that even if you are one of the few who has a gift for investing, you need to be investing a lot of money to break even. Assume 1. it takes an extra 500 hours a year to research and buy good investments. 2. you make $60 an hour 3. all your hard work delivers a respectable alpha of 3%(3% better returns than than the market) You need to be investing approximately 1 million dollars to break even.

potatosareok 11y ago
I don't understand this at all. In what world is there an infinite amount of hours I can work? Most people work 40 hours a week and if they work more don't get paid extra (barring overtime but do you work somewhere where you can just work 100 hours a week and put in 60 hours of overtime because you felt like it?). Between weekends and just general downtime in week (I spend time watching netflix and browsing the internet and I read books in my commute) I have at least 30 hours free a week. If you're into stocks as much as I'm into wasting time entertaining myself then why not.

js4 11y ago

Don't listen to this. You can beat the market --there are plenty of people that do. The thing about investing is that it takes experience and you unfortunately only get that by investing. One thing you don't want to do is trade. You want to act like an owner. That means find companies and get involved for the long term. Also remember there is no free money out there. Investing takes a lot of work and often times doesn't pay off for years.