Does average of of all investors returns = market average return?

[CCCA]

I understand that there are fees and commissions make this question slightly more complicated, but if we were to remove those things, is it the case that the weighted stock market returns of all investors is equal to the market return (e.g. VTI ETF returns). 


I'm wondering if this is kind of like a zero-sum game (again assuming no fee or commission drag), where the balance point is not zero but instead the market average.  So for every person whose returns are lower than the market average, you'll have people who are beating the market average. 


Is this the right way to think about this?  I'm thinking about this in light of the questions about stock picking and market timing.  For all the people who are bad at these things and do poor relative to the market, shouldn't there be people who are good at these things and do well relative to the market.  Now of course this doesn't mean they are consistently better or worse than the market.  However, I'm sure there are people who are consistently worse than the market because they don't have the temperment to hold when things look bad and get excited and buy stocks when they are at all time highs.

[sol]

Minus fees and commissions, it would be the same iff you cap weighted the individual accounts.

Big investors like pension fund managers have historically outperformed the market with enormous sums of money, which means individual small investors have historically underperformed the market.  If you just averaged all of the small investors (many) and the pension funds (few) you would see a number much lower than total market returns.  You have to adjust for the number of dollars in each account.

And just to further screw with your head, the indices we all track are cap weighted, too.  Out of the five hundred different stocks in the SP500, Apple and Microsoft alone make up over 7% of the index price, despite being nowhere near 7% of the economy, or 7% of the shares, or 7% of the profits.

[Radagast]

You are correct that minus fees and commissions it is a zero sum game. So the big message is to absolutely minimize those.

While the average capitalization weighted investor will equal the market, the median investor may be a totally different story. There is a tendency for the large majority of investors and company stocks to do poorly, while a small number do extraordinarily well. So perhaps only the top 25% will be equal to or better than average, rather than the top 50% which you might normally expect.

[CCCA]

Minus fees and commissions, it would be the same iff you cap weighted the individual accounts.

Big investors like pension fund managers have historically outperformed the market with enormous sums of money, which means individual small investors have historically underperformed the market.  If you just averaged all of the small investors (many) and the pension funds (few) you would see a number much lower than total market returns.  You have to adjust for the number of dollars in each account.

And just to further screw with your head, the indices we all track are cap weighted, too.  Out of the five hundred different stocks in the SP500, Apple and Microsoft alone make up over 7% of the index price, despite being nowhere near 7% of the economy, or 7% of the shares, or 7% of the profits.

Sol, thanks, that makes sense and of course should be weighted by account size.  One ginormous fund could make 1% more than the market average to balance out all of the suckers who day-traded and lost big.  If pensions can historically outperform the market, couldn't those same managers also be mutual fund managers and out perform the market? 


On the subject of cap weighting Apple has a lower PE ratio (17) than the SP500 (24) so I don't think you are correct about them.  MSFT, I just looked up, has a PE ratio of 74, so you are correct about them. 

[CCCA]

You are correct that minus fees and commissions it is a zero sum game. So the big message is to absolutely minimize those.

While the average capitalization weighted investor will equal the market, the median investor may be a totally different story. There is a tendency for the large majority of investors and company stocks to do poorly, while a small number do extraordinarily well. So perhaps only the top 25% will be equal to or better than average, rather than the top 50% which you might normally expect.

That make sense since the stock market is not a finite game, but continues on indefinitely.  If there's a modest chance of losing big (relative to the market) by making the wrong choice, then as long as you continue trading you'll eventually lose.  It's probably like gambling as people have a hard time stopping when they are ahead.  And since the game isn't symmetrical.  Going up 100% is not equivalent to going down 100%, in the latter case, you're done.  In the former, you'll keep pushing your luck against the chance of going down big.   

[ChpBstrd]

I think the OP is approaching a paradox. Imagine a simplified investing world consisting of market timers/stock pickers who underperform the market, in aggregate, and buy-and-hold investors/funds, who get exactly the market return, in aggregate. The combination of some players in the game who get below average and others who get exactly average seems impossible.

The solution is the concept of gambler's ruin. As the market timers/stock pickers lose, they become a smaller and smaller component of the investment world until they are negligible. Their effect is probably to earn "new" money from their jobs and lose it to their bigger buy-n-hold competitors buy buying high and selling low. In doing so, they help lift the average returns above where they'd be with only buy-n-holders in the ecosystem.They also subsidize the brokerage and financial media industries FWIW.

https://en.m.wikipedia.org/wiki/Gambler%27s_ruin

[sol]

Possible, but gamblers ruin seems unlikely while so much of the market is still played actively.

Easier to understand, and closer to reality IMO, is a simplified market with one dude who gets slightly positive average market returns with ten trillion dollars and 999 dudes who each suffer 50% losses on one invested dollar each.  There are 1000 total investors and 99.9% of them underperformed so the "average" individual return is approximately -50%, no matter what the market does as a whole. 

All of those little fish just don't matter, when there's a whale in the pond.

Of course the reality is slightly more complicated, because invested assets don't set prices, only transactions do that.  The whale would have to be buying and selling to himself (or another whale), and putting new money in to raise the prices, but that's literally exactly what happens with pension funds that deduct from every employee's paycheck, or insurance companies that invest their float.  Institutional investors are driving this train, not you and me.

The whole thing is a shell game anyway.  The Fed can make up money at will, and with moderate tinkering we can put it into stock prices, or wages, or infrastructure, or long term debt, or dead foreigners.  Remember that stock prices are just the last price one person paid for a share, not what the share is actually worth and certainly not what every single share is worth.  Shares themselves are just as made up as the dollars we use to buy them. 

The whole system is just a score keeping system designed to incentivize economic turnover, so that people will work and buy and consume and work some more.  The Fed makes up dollars and then a company makes up shares to trade for those made up dollars, and along the way some individual humans amass power and control over other individual humans.  And if we're lucky we also grow some food and build some highways or hospitals so that people can live out their short little lives with minimal suffering. 

That's all the economy is.  There is no objective store of value, there has only ever been human labor that generates work, and the select few (royalty, etc) who profit from that labor by telling everyone what to labor towards.  Companies aren't themselves worth anything, they only have worth because of the products and profits they promise to produce in the future, at the direction of their leadership, and through the efforts of their employees.

"Labor is the source of all value."  Go ahead, look it up and read all about it.  Everything else is part of the shell game.