Why you should not try to beat the market

don't try to Beat The Market_Sweat Your Assets

Beat the market: click bate financial porn or realistic goal?

You might have read headlines about an investor or fund manager that has “beaten the market”, followed by suggestions on how to do it. An all-industry tries to entertain you with such ideas or even push you to try.

However, wise money management often implies being a contrarian to news-talking heads. Building firewalls to marketing b.s. and financial porn would not be unwise.

Acting like a modern Ulysses, you could try resisting the bewitching song of the sirens by having your crew tie you up when needed! Ulysses’ method is not convenient today. So, let’s cut it to the chase by exposing the nonsense of trying to beat the market.

First, let’s contextualize the meaning of beating the market before discussing why you should not try to beat the market. In business terms, it entails obtaining better results than an industry standard. Personal investments entail obtaining (annual) returns higher than the returns of its market benchmark.

In plain English, looking at the US stock market, beating the market means beating the returns of the S&P500 Index, which capture 500 large-cap companies across all industry sectors.

Example: If during the last 12 months, the S&P500 has grown 5%, and your investment portfolio has grown more than 7%, you could state that last year you beat the market.

Still, things are not that simple. While the analysis is not wrong, it is not accurate or meaningful.

10 aspects to consider when you try to beat the market

  1. To correctly judge the performance of two investments for the retail investor and provide meaningful opinions,  we should compare apples with apples, considering all things equal. Does your portfolio have the same risk profile as the S&P500? If you build a more aggressive, concentrated, and ultimately riskier portfolio, you should demand higher returns. As such, two investment returns should be compared, considering the underlying investments’ risk-reward ratio.
  2. Does it make sense to compare two portfolios for 12 months? For a retail investor, it is essential to build sound long-term investments. The point is to win the marathon, not the 100 m sprint. While we can monitor daily, monthly, or annual performances, this is not meant to judge the returns of a long-term investment portfolio during a short period.
  3. While we can anticipate that professional investor, selling their services,  promise you to beat the market to justify their fees, public records, and academic studies shows the following:
    • Very few professional investors have been able to beat the market for several years consistently.
    • It is important to compare returns after fees! While most professional investors don’t beat the market before management fees, even less professional investors beat the market after deducting their management fees. This is another major challenge in comparing returns.
    • Many analyses compare theoretical returns without calculating country risks, currency risks, taxes on capital gains or management fees. As such, the performance of many funds “on the screen” and your real account are quite different! Even if it looks like the fund is beating the market, if the management fee of the account is high, or if the fund relies on high trading, you are exposed to higher fees than with a simple S&P500 index fund (aka the US Stock Benchmark of the market).
  4. There is a clear difference between investing, speculating and gambling. The ego is the enemy. Calm your ego. If you search for excitement, look somewhere else. Don’t play with your savings.
  5. Wealth will not be generated by pure investment performance but by investment psychology (avoiding big emotional mistakes with market timing or stock picking), and by effectively managing everything outside your investment portfolio (income, expenses, savings, lifestyle).
  6. The capital market is an exceptional wealth machine. However, believing you will become rich only thanks to the return on your investments is not advisable. Long-term investments provide wealth protection and wealth growth. However, your income skills and your control of expenditures are fundamental strategic levers for your wealth creation. 
  7.  As a private, non-professional investor, it is highly advised not to beat the market but rather “BE the Market“. Stay invested and take advantage of well-allocated financial and business resources by relying on low fees-based S&P500 index funds (aka the market).
  8. It does not make sense to try to be like Warren Buffett or clone someone else investments. You might not have the same risk profile, character, dedication or historical circumstances.
  9. Don’t forget professional investors invest OTP (other people’s money). As such, they make money out of fees, no matter what. If they lose some money, it is not the end of their world. They will raise new money from other investors. It won’t be the same with your savings.
  10. Instead of trying to beat the market, try not to lose against the market. It is less brilliant but more effective. The point is that most of us are amateurs (average investors), but we refuse to believe it. This is a problem because we’re often playing the game of professionals. As Charles Ellies famously highlighted, we try to win the Loser’s game (youtube video). What we should do instead, when we’re the amateur, is to invert the problem. Rather than trying to win, we should avoid losing. This was a point Charlie Munger, the billionaire business partner of Warren Buffett, made in a letter to Wesco Shareholders, where he was at the time Chairman (and found in the excellent Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger), Munger writes:

    Wesco continues to try more to profit from always remembering the obvious than from grasping the esoteric. … It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid instead of trying to be very intelligent. There must be some wisdom in the folk saying, `It’s the strong swimmers who drown.’



Bottom Line 

  • We met the enemy. It is us! Look for exotic strategies and excitement elsewhere. With your savings and wealth, don’t try to beat the market.
  • It is not about timing the market, but time in the market” that makes the difference! Try not to lose against the market. Be the market!
  • Don’t look for home runners. Look to double your money every ten years (Rule of 72, if you invest in the Market Benchmark – S&P500). 

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