Originally posted by: PokerGuy
Originally posted by: iversonyin
Originally posted by: PokerGuy
Since I believe the markets are at least semi-strong efficient (if not strong form efficient), it stands to reason that nobody will outperform the market in the long run given equal risk assumptions. Based on that, frequent buying / selling to try and make quick profits is stupid -- you won't outperform the market in the long run, but you are paying more in comissions than someone who is not churning. Edward Jones is correct in this case.
<queue up all the "but I doubled my money in three months!" idiots>
No matter what people say, I've never seen a legitimate study show that anyone has beat the market over a long term when the risk levels are accounted for.
Of course not, because most people don't research. How would you account for risk vs. reward? I'm just wondering. Do you look at beta? do you look at standard deviation?
Most mutual fund managers couldn't outperform because of the large amount of money they manage. But I think a retail investor that is knowledgable can beat the market consistently given that they have a risk management strategy and do their research.
To give in to index fund or mutual fund or NOT investing is just a lazy way of saying "its too hard, I quit". Consider index fund charge expense and you pay tax, your return wouldn't even be close to the index.
I don't see any reason a fund manager would not be able to outperform just because he's managing a large amount of money. Even a large fund's investments are paltry compared to the market as a whole. Given economies of scale and top level research and access to information and markets that individuals do not have, you'd think if anyone could outperform the market.
But I think a retail investor that is knowledgable can beat the market consistently given that they have a risk management strategy and do their research.
I don't buy it -- are you telling me that retail investor can do more/better research than firms that have entire departments doing that kind of research that have access to every tool imaginable? Individuals can no more beat the market in the long term than groups of investors or mutual fund managers.
The more I follow the markets the more I believe a broad diversified portfolio including index funds is the best long term path....... Forget trying to time the market or jump from stock to stock trying to find the hot deal etc, it simply doesn't work over the long term, unless you have some magic knowledge that millions of other pros do not.
The pros used to have insider info, but not anymore. What research do they have that make them more knowledgable than a retail investor? They look at 10-Ks, they look at the company earning trend- the only thing they have its bunch of MIT graduates running more sophisticated earning models. But even the smartest pros failed- Long Term Capital Management (stars studded with Nobel Prize winners).
I tell you why economy of scale doesn't work in this business. A mutual fund/hedge fund take on huge position in stocks or futures (or any instrument). Everytime they get in a position, they have to buy into very liquid instrument or else they pay alot of spread. Imagine buying 1 million share of XYZ corp while they stock avg trading volume is 1-2 mil/day. And imagine the price they have to pay to get out. (selling when noone is buying becasue of bad news- is it easier to get out of 1 million shares or 1000 share?) - This is the advantage that retail ivestors have...getting in and out quickly without paying huge spread/without moving the price of the asset.
You as a small retail investor, can setup stop order to prevent huge loss. Technology these days help you cut comission cost. SEC and other regulatory bodies are trying to make this game as fair to retail investors as possible (after the collaspe of Enron and Worldcom). Wall St. analysts no longer can tout a stocks for its investment banking business. CEOs can no longer disclose inside info to these analysts. The game has changed.
Most people can beat the return of these fund managers, but they don't bother. Why spend couple hours a week doing research instead of watching football/playing with the kids? (who the heck want to learn how to read a 10-K or listen to conference call?!) Its always easier to be lazy and just buy an index fund/mutual fund and forget about it.
What retail investors have is flexibility, agility and nimbleness.
And remember the hedge fund guy that blew $6 bil on natural gas bet? Has he not taken such a huge position- the damage wouldn't be so big- he couldn't lay off his position in the open market, he has to sell them to other insitutions( and they are gurantee to rip you off - read "When Genius failed").
I don't recall the exact article, but its in Kiplinger somewhere. They mentioned that funds usually perform well (usually the small caps fund) when they started, once they get more money, the return of the fund would start to mimic the one of a smallcap index.
To sum it up, most people can beat index return, but they just don't bother trying.- Another article in Kiplinger that mentioned couple of these investors. - And how the heck you think Warren Buffet started?
Knowledge is power.
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