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That's not why it's hard to beat the market. It's hard to beat the market, because people have way too short horizon. Take your example here - it's absolutely

That's not why it's hard to beat the market. It's hard to beat the market, because people have way too short horizon. Take your example here - it's absolutely meaningless what's up or down or flat over a 2 weeks period... The reality in the stock market is, that you can make money investing long term (let's say >5 years horizon) in good or great companies, running well a very short term strategy (market making, hft, arbitrage), but usually you cannot do any money when your horizon is somewhere in between. And the issue is, for most people, that's the case....

paulpauper 3y ago
people often underform the stock market in an attempt to beat it .that was the point
- AnthonyMouse 3y ago
  50% of people are below average. But somebody's on the other side of those trades.
  - quickthrower2 3y ago
    If you buy/sell a lot then there are also fees, both to brokers and I guess implied fees to market makers. So there are more than 2 parties involved (buyer and seller), and so more than 50% can lose.
    - AnthonyMouse 3y ago
      There are plenty of no-fee brokerages and market makers arguably narrow the spread. But it doesn't really matter if the percent who lose on net is 50% or 51% if you're at the 75th percentile. And a large plurality of people are. You don't have to be in the top 0.1% to come out ahead. The reason for the usual advice is that 50% of people are below average. And then they get mad when the market proves it to them, so the advice that keeps them satisfied is to buy an index fund.
      - quickthrower2 3y ago
        The statistics would be interesting. While 50% of trades are below average, that might translate to a different percentage of trading entities. (like 5 drunk idiots and one sober professional playing poker in a casino)
        AnthonyMouse 3y ago
        A fool and his money are soon parted. There may be people who show up to the casino drunk, and that can enrich quite a number of other patrons, but then they go home bankrupt and have nothing to play with tomorrow. The steady-state number of drunk idiots is bound to be small because they're self-eliminating.
        quickthrower2 3y ago
        Ok that os where the analogy breaks down I guess. In the stock market the “idiots” don’t lose their money, they just get below average returns. The average of 1,1,1,1,1,37 is 7. If these are % yoy gains of traders who try to beat the market.
        AnthonyMouse 3y ago
        Some of the people who try to beat the market do actually lose their money. You can go play games with options trading or short selling or high volatility stocks and not just get 1% instead of 7%, you can lose the majority of your principle. Or all of it. Or even end up in debt. The average of 37, 8, 8, 8, 8, -27 is also 7.
        FooBarBizBazz 3y ago
        1.01^5 * 1.37 = 1.43988 1.43988^(1/6) = 1.06264 So, really 6.26% CAGR. Not a huge difference here. But it is lower. The difference really shows up when you start seeing losses. The extreme case of one year with 100% loss demonstrates things.
  - TheAlchemist 3y ago
    If by average you mean 'mean' that is not true - it's very skewed. So most people loose money, and a rather small group (say 10%) is raking up most of the gains.
    - AnthonyMouse 3y ago
      Do you have any reason to believe that to be true? It could just as easily be the other way. One big fat idiot can lose all their money to a large number of people who then each beat the market by a small margin.
      - TheAlchemist 3y ago
        It could indeed. I think it's pretty common knowledge that most funds and stock pickers underperform the benchmarks. I think for retail investors the ballpark figure is like 90% underperformers. Warren Buffett took a bet in 2008 that over the next 10 years, a low cost S&P 500 index fund will outperform active hedge funds - and it did. Granted, it's not a proof or anything, but it's interesting: https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe...
        AnthonyMouse 3y ago
        Fund managers are a different kind of thing, because it's a principal-agent problem. The fund manager has different incentives than the client. He wants to get a bonus, so he takes risks consistent with the structure of his bonus contract even if they're not aligned with the interests of the investor. It's not surprising that underperforms, it's a textbook perverse incentive. But people often get ahead by understanding an industry. For example, when Stable Diffusion became available last year, someone who was paying attention might have noticed that it was likely to become popular and spike demand for GPUs to run it on. If that person went out and bought some shares of NVDA or AMD at that point, they'd be happy with where it is today compared to an index fund. But a major index fund is unlikely to temporarily change the ratio of those companies in the index in response to that kind of information, so the higher returns are only available to people who are paying attention and willing to take the risk with their own money.
- quickthrower2 3y ago
  The index does well because it doesn't need a crystal ball?

paulpauper 3y ago

people often underform the stock market in an attempt to beat it .that was the point

AnthonyMouse 3y ago
50% of people are below average. But somebody's on the other side of those trades.
- quickthrower2 3y ago
  If you buy/sell a lot then there are also fees, both to brokers and I guess implied fees to market makers. So there are more than 2 parties involved (buyer and seller), and so more than 50% can lose.
  - AnthonyMouse 3y ago
    There are plenty of no-fee brokerages and market makers arguably narrow the spread. But it doesn't really matter if the percent who lose on net is 50% or 51% if you're at the 75th percentile. And a large plurality of people are. You don't have to be in the top 0.1% to come out ahead. The reason for the usual advice is that 50% of people are below average. And then they get mad when the market proves it to them, so the advice that keeps them satisfied is to buy an index fund.
    - quickthrower2 3y ago
      The statistics would be interesting. While 50% of trades are below average, that might translate to a different percentage of trading entities. (like 5 drunk idiots and one sober professional playing poker in a casino)
      - AnthonyMouse 3y ago
        A fool and his money are soon parted. There may be people who show up to the casino drunk, and that can enrich quite a number of other patrons, but then they go home bankrupt and have nothing to play with tomorrow. The steady-state number of drunk idiots is bound to be small because they're self-eliminating.
        quickthrower2 3y ago
        Ok that os where the analogy breaks down I guess. In the stock market the “idiots” don’t lose their money, they just get below average returns. The average of 1,1,1,1,1,37 is 7. If these are % yoy gains of traders who try to beat the market.
        AnthonyMouse 3y ago
        Some of the people who try to beat the market do actually lose their money. You can go play games with options trading or short selling or high volatility stocks and not just get 1% instead of 7%, you can lose the majority of your principle. Or all of it. Or even end up in debt. The average of 37, 8, 8, 8, 8, -27 is also 7.
        FooBarBizBazz 3y ago
        1.01^5 * 1.37 = 1.43988 1.43988^(1/6) = 1.06264 So, really 6.26% CAGR. Not a huge difference here. But it is lower. The difference really shows up when you start seeing losses. The extreme case of one year with 100% loss demonstrates things.
- TheAlchemist 3y ago
  If by average you mean 'mean' that is not true - it's very skewed. So most people loose money, and a rather small group (say 10%) is raking up most of the gains.
  - AnthonyMouse 3y ago
    Do you have any reason to believe that to be true? It could just as easily be the other way. One big fat idiot can lose all their money to a large number of people who then each beat the market by a small margin.
    - TheAlchemist 3y ago
      It could indeed. I think it's pretty common knowledge that most funds and stock pickers underperform the benchmarks. I think for retail investors the ballpark figure is like 90% underperformers. Warren Buffett took a bet in 2008 that over the next 10 years, a low cost S&P 500 index fund will outperform active hedge funds - and it did. Granted, it's not a proof or anything, but it's interesting: https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp https://www.investopedia.com/articles/investing/030916/buffe...
      - AnthonyMouse 3y ago
        Fund managers are a different kind of thing, because it's a principal-agent problem. The fund manager has different incentives than the client. He wants to get a bonus, so he takes risks consistent with the structure of his bonus contract even if they're not aligned with the interests of the investor. It's not surprising that underperforms, it's a textbook perverse incentive. But people often get ahead by understanding an industry. For example, when Stable Diffusion became available last year, someone who was paying attention might have noticed that it was likely to become popular and spike demand for GPUs to run it on. If that person went out and bought some shares of NVDA or AMD at that point, they'd be happy with where it is today compared to an index fund. But a major index fund is unlikely to temporarily change the ratio of those companies in the index in response to that kind of information, so the higher returns are only available to people who are paying attention and willing to take the risk with their own money.
quickthrower2 3y ago
The index does well because it doesn't need a crystal ball?