Author Topic: how easy is it to beat the market average returns?  (Read 9356 times)

rob in cal

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how easy is it to beat the market average returns?
« on: April 23, 2017, 09:44:48 AM »
   So I'm wondering just how easy or difficult it is to beat the average stock market returns on a consistent basis. If you listen to some people its just a matter of some quick research on mutual funds that have been outperforming the market over the last few years and presto, just like that you too can join the club. Personally I just have index funds (S&P 500) and am skeptical about how easy it is to find  mutual funds that will consistently beat it.

MustacheAndaHalf

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Re: how easy is it to beat the market average returns?
« Reply #1 on: April 23, 2017, 10:17:51 AM »
For those with millions to spend on research and a full time staff, extremely hard.  SPIVA scorecard shows for all funds v.s. the S&P 1500 ("Total Market", roughly) about 87-95% fail to beat the index.  87% for the 3-year and 10-year time frames, and 95% for 5-years.  It could vary over time, but it tends to be a very, very high number that fall short despite having a team dedicated to beat the market.

One better way to frame the debate - it's not the "average" that you're buying.  The stock market is a tug of war between experts, and their buying and selling represents the consensus advice of what each company's stock is worth.  An index fund accepts the consensus of the experts, and buys the market.  Everyone else is trying to beat the market - to beat everyone else's combined opinions.  Odds are they won't.

http://us.spindices.com/documents/spiva/spiva-us-mid-year-2016.pdf

wenchsenior

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Re: how easy is it to beat the market average returns?
« Reply #2 on: April 23, 2017, 10:24:45 AM »
I am sincerely just joking, and not being nasty.  But my first thought was "222 posts and you don't know the general opinion on MMM about this topic?"  :g:

bacchi

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Re: how easy is it to beat the market average returns?
« Reply #3 on: April 23, 2017, 10:42:50 AM »
Dude, it's so easy that everyone is doing it.

steveo

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Re: how easy is it to beat the market average returns?
« Reply #4 on: April 23, 2017, 04:46:46 PM »
It's extremely easy. Hedge fund managers consistently beat the market and they tend to be stupid and uneducated.

Babybalrog

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Re: how easy is it to beat the market average returns?
« Reply #5 on: April 23, 2017, 05:05:30 PM »
I'll make a blasphemous statement and say "It's pretty easy"
The problem is, how do you define "the market"? Most people define it as the S&P 500. Thus when you read the prospectus of a mutual fund they will set their benchmark by it, and fail. As said above they are not capable of besting all the other managers out there. However there are other ways to slice stocks, not just "top" 500. Smaller companies aka small caps have far more room to grown and expand, but are also more volatile.

http://www.marketwatch.com/story/8-lessons-from-80-years-of-market-history-2014-11-19
Quote
Many people think the S&P 500 index represents "the market," but it doesn't. In fact, over the long haul each of the other three asset classes outperforms this index by a long shot, as you will see from the right-hand column in the table. I could have made a table with single-year figures, but for most readers that would be far too much data.

1930-2013 CAGR
S&P 500  Index - 9.7
Large-Cap Value - 11.2
Small-Cap - 12.7
Small-Cap Value - 14.4

Over the last 80 years, “beating the market” has been very easy if you regard the S&P 500 Index as the market.
The adage that investors get paid to take risks seems to be working just fine. Large-cap value stocks are riskier than the S&P 500, and they paid more. Small-cap growth stocks are riskier than large-cap value stocks, and they paid more. Small-cap value stocks are the riskiest among these asset classes, and they paid the highest long-term return.

Now there risk, whole decades where small caps loose. But if you are long term investor, it pays off. This is the same reason people on these forums recommend "total market funds" because they include more than the S&P 500, and therefore get a little bit of this extra growth, long term. But never assume there is one best investment, corrected for risk, variability, and liquidity; they all come out equal. But are You willing to trade one for the other? (and what fees do you pay)

Risk: Junk bonds vs treasuries. Sure they have higher yield but they could default
Variability: Small cap vs Large Cap
Liquidity: The reason a CD has a higher interest rate then a checking account. Your money is locked away per contract (same for bonds)

In closing I'll restate this;
But never assume there is one best investment, corrected for risk, variability, and liquidity; they all come out equal.



SeattleCPA

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Re: how easy is it to beat the market average returns?
« Reply #6 on: April 24, 2017, 07:09:06 AM »
It's extremely easy. Hedge fund managers consistently beat the market and they tend to be stupid and uneducated.

You're joking, right?

P.S. The Economist reports on the median hedge returns each week (along with other asset class median returns).

SeattleCPA

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Re: how easy is it to beat the market average returns?
« Reply #7 on: April 24, 2017, 07:11:14 AM »
For those with millions to spend on research and a full time staff, extremely hard.  SPIVA scorecard shows for all funds v.s. the S&P 1500 ("Total Market", roughly) about 87-95% fail to beat the index.  87% for the 3-year and 10-year time frames, and 95% for 5-years.  It could vary over time, but it tends to be a very, very high number that fall short despite having a team dedicated to beat the market.

One better way to frame the debate - it's not the "average" that you're buying.  The stock market is a tug of war between experts, and their buying and selling represents the consensus advice of what each company's stock is worth.  An index fund accepts the consensus of the experts, and buys the market.  Everyone else is trying to beat the market - to beat everyone else's combined opinions.  Odds are they won't.

http://us.spindices.com/documents/spiva/spiva-us-mid-year-2016.pdf

+1

Scandium

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Re: how easy is it to beat the market average returns?
« Reply #8 on: April 24, 2017, 08:57:37 AM »
I'll make a blasphemous statement and say "It's pretty easy"
The problem is, how do you define "the market"? Most people define it as the S&P 500. Thus when you read the prospectus of a mutual fund they will set their benchmark by it, and fail. As said above they are not capable of besting all the other managers out there. However there are other ways to slice stocks, not just "top" 500. Smaller companies aka small caps have far more room to grown and expand, but are also more volatile.

http://www.marketwatch.com/story/8-lessons-from-80-years-of-market-history-2014-11-19
Quote
Many people think the S&P 500 index represents "the market," but it doesn't. In fact, over the long haul each of the other three asset classes outperforms this index by a long shot, as you will see from the right-hand column in the table. I could have made a table with single-year figures, but for most readers that would be far too much data.

1930-2013 CAGR
S&P 500  Index - 9.7
Large-Cap Value - 11.2
Small-Cap - 12.7
Small-Cap Value - 14.4

Over the last 80 years, “beating the market” has been very easy if you regard the S&P 500 Index as the market.
The adage that investors get paid to take risks seems to be working just fine. Large-cap value stocks are riskier than the S&P 500, and they paid more. Small-cap growth stocks are riskier than large-cap value stocks, and they paid more. Small-cap value stocks are the riskiest among these asset classes, and they paid the highest long-term return.

Now there risk, whole decades where small caps loose. But if you are long term investor, it pays off. This is the same reason people on these forums recommend "total market funds" because they include more than the S&P 500, and therefore get a little bit of this extra growth, long term. But never assume there is one best investment, corrected for risk, variability, and liquidity; they all come out equal. But are You willing to trade one for the other? (and what fees do you pay)

Risk: Junk bonds vs treasuries. Sure they have higher yield but they could default
Variability: Small cap vs Large Cap
Liquidity: The reason a CD has a higher interest rate then a checking account. Your money is locked away per contract (same for bonds)

In closing I'll restate this;
But never assume there is one best investment, corrected for risk, variability, and liquidity; they all come out equal.

I get your point, but I don't think most people consider just the S&P 500 "the market" these days. VTSAX has been easily available since what, mid 90s? Comparing to the S&P is outdated (expect if you're looking at large-blend of course, duh). Anytime I look at anything vs "the market" it's against VTSAX or a similar broad fund. Why would I exclude mid and small when I can buy that for 5 bps?!

2Birds1Stone

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Re: how easy is it to beat the market average returns?
« Reply #9 on: April 24, 2017, 08:58:33 AM »
It's so damn easy that 99% of people who try, end up underperforming the market instead......happy hunting ;)

trollwithamustache

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Re: how easy is it to beat the market average returns?
« Reply #10 on: April 24, 2017, 10:34:43 AM »
Its pretty easy to beat the market average about half the time! :)



Car Jack

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Re: how easy is it to beat the market average returns?
« Reply #11 on: April 24, 2017, 11:23:21 AM »
There's a good article in Marketwatch (really!) that points out survivorship bias.  What's that?  Well, when a fund is so bad that they're just going to give up, they do one of two things.  They either liquidate and send the money back to the investors or they merge in with a successful fund.  In the last 15 years, 2/3 of all actively managed funds have gone through liquidation or merging and along with this action, their existance is erased from the world.  So the "new" fund that's absorbed doesn't say "hey, this turd lost 90% of its assets, we have to recalculate our success rate now that we've merged".  They instead say "Whooo hoooo, we got new funds and as far as we're concerned, they are at neutral right now".  So of the 1/3 of funds that remain today, somewhat evenly split for winners and losers, we're down to what?  17% that might beat the market this year.  Read the article.  It works out to something like 5% that have a chance to beat the market.  Good luck picking those.

Tyson

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Re: how easy is it to beat the market average returns?
« Reply #12 on: April 24, 2017, 11:30:37 AM »
Maybe you beat the market, maybe you don't.  One thing for certain, you are going to introduce a TON of work and stress by trying.

I don't know about you, but the whole point of FIRE is to reduce work and stress. 

Babybalrog

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Re: how easy is it to beat the market average returns?
« Reply #13 on: April 24, 2017, 03:35:39 PM »
Its pretty easy to beat the market average about half the time! :)

Win!

I also liked this quote from  MustacheAndaHalf
Quote
The stock market is a tug of war between experts, and their buying and selling represents the consensus advice of what each company's stock is worth.  An index fund accepts the consensus of the experts, and buys the market.

Pick an index, buy the ETF. Enough said.
« Last Edit: April 25, 2017, 09:15:14 AM by Babybalrog »

steveo

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Re: how easy is it to beat the market average returns?
« Reply #14 on: April 24, 2017, 06:37:33 PM »
It's extremely easy. Hedge fund managers consistently beat the market and they tend to be stupid and uneducated.

You're joking, right?

P.S. The Economist reports on the median hedge returns each week (along with other asset class median returns).

No I'm deadly serious. Hedge funds tend to take the dumbest people available and pay them millions of dollars per year. They also always beat the market. Have you seen Buffet's bet against the hedge fund managers. Those hedge fund managers are absolutely destroying the market. Buffet has lost that bet for sure.

MOD EDIT: Stop trolling.
« Last Edit: May 11, 2017, 09:13:10 AM by arebelspy »

surfhb

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Re: how easy is it to beat the market average returns?
« Reply #15 on: April 24, 2017, 09:08:32 PM »
It's extremely easy. Hedge fund managers consistently beat the market and they tend to be stupid and uneducated.

You're joking, right?

P.S. The Economist reports on the median hedge returns each week (along with other asset class median returns).

No I'm deadly serious. Hedge funds tend to take the dumbest people available and pay them millions of dollars per year. They also always beat the market. Have you seen Buffet's bet against the hedge fund managers. Those hedge fund managers are absolutely destroying the market. Buffet has lost that bet for sure.

Very few beat the market over several decades. 

A retarded monkey can beat the market in these times.     Times are good kiddos....enjoy it while it lasts  ;)   Guaranteed most of you will lose your shit and sell once the next major correction hits. 
« Last Edit: April 24, 2017, 09:12:14 PM by surfhb »

Khan

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Re: how easy is it to beat the market average returns?
« Reply #16 on: April 24, 2017, 09:14:37 PM »
Maybe you beat the market, maybe you don't.  One thing for certain, you are going to introduce a TON of work and stress by trying.

I don't know about you, but the whole point of FIRE is to reduce work and stress.

This is extremely, doubleplus true for Mustachian low absolute networth individuals.

Let's say you actually -could- reasonably beat the market, but it takes 5+ hours a week to do, and only increased gains +3%/year. That means that if you had 50k that you were actively investing with, your efforts would require 260 hours a year, would only net you $1500 extra dollars, and comes out to a whopping $5.6/hour for your efforts.

Of course, the real world doesn't work like that. You're actually far more likely to underperform as all research shows. You could've put that time into something far more worthwhile, like learning to repair your appliances, career progression, cooking meals, etc.

Runge

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Re: how easy is it to beat the market average returns?
« Reply #17 on: April 24, 2017, 09:25:44 PM »
It's extremely easy. Hedge fund managers consistently beat the market and they tend to be stupid and uneducated.

You're joking, right?

P.S. The Economist reports on the median hedge returns each week (along with other asset class median returns).

No I'm deadly serious. Hedge funds tend to take the dumbest people available and pay them millions of dollars per year. They also always beat the market. Have you seen Buffet's bet against the hedge fund managers. Those hedge fund managers are absolutely destroying the market. Buffet has lost that bet for sure.

Are you sure about that?
http://fortune.com/2017/02/25/warren-buffett-scorches-the-hedge-funds/

kenaces

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Re: how easy is it to beat the market average returns?
« Reply #18 on: April 24, 2017, 09:29:52 PM »
It is easy just move to Lake Wobegon

steveo

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Re: how easy is it to beat the market average returns?
« Reply #19 on: April 25, 2017, 01:53:53 AM »
It's extremely easy. Hedge fund managers consistently beat the market and they tend to be stupid and uneducated.

You're joking, right?

P.S. The Economist reports on the median hedge returns each week (along with other asset class median returns).

No I'm deadly serious. Hedge funds tend to take the dumbest people available and pay them millions of dollars per year. They also always beat the market. Have you seen Buffet's bet against the hedge fund managers. Those hedge fund managers are absolutely destroying the market. Buffet has lost that bet for sure.

Are you sure about that?
http://fortune.com/2017/02/25/warren-buffett-scorches-the-hedge-funds/

I'm pretty sure that is a fake news site. That Buffet guy has no idea what he is talking about.

Finallyunderstand

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Re: how easy is it to beat the market average returns?
« Reply #20 on: April 25, 2017, 10:14:17 AM »
It's extremely easy. Hedge fund managers consistently beat the market and they tend to be stupid and uneducated.

You're joking, right?

P.S. The Economist reports on the median hedge returns each week (along with other asset class median returns).

No I'm deadly serious. Hedge funds tend to take the dumbest people available and pay them millions of dollars per year. They also always beat the market. Have you seen Buffet's bet against the hedge fund managers. Those hedge fund managers are absolutely destroying the market. Buffet has lost that bet for sure.

Are you sure about that?
http://fortune.com/2017/02/25/warren-buffett-scorches-the-hedge-funds/

I'm pretty sure that is a fake news site. That Buffet guy has no idea what he is talking about.

and we have found the troll

trollwithamustache

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Re: how easy is it to beat the market average returns?
« Reply #21 on: April 25, 2017, 10:46:30 AM »
Seriously though guys, if someone on this website really knew how to beat the market, would they tell anyone?

This has always been my issue with investment newsletters...

AlanStache

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Re: how easy is it to beat the market average returns?
« Reply #22 on: April 25, 2017, 11:13:58 AM »

This is extremely, doubleplus true for Mustachian low absolute networth individuals.

Let's say you actually -could- reasonably beat the market, but it takes 5+ hours a week to do, and only increased gains +3%/year. That means that if you had 50k that you were actively investing with, your efforts would require 260 hours a year, would only net you $1500 extra dollars, and comes out to a whopping $5.6/hour for your efforts.

Of course, the real world doesn't work like that. You're actually far more likely to underperform as all research shows. You could've put that time into something far more worthwhile, like learning to repair your appliances, career progression, cooking meals, etc.

+1

I have played around with some methods that tested well on paper but in the end it is not worth my time or the added risk. 

If you enjoy the challenge of the research and analysis go for it but dont fool yourself about it getting you mad stacks of cash. 

neo von retorch

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Re: how easy is it to beat the market average returns?
« Reply #23 on: April 25, 2017, 11:28:59 AM »
So I've been talking to a friend about this. He has most of his money in retirement accounts (401k and/or teacher equivalent?) with whatever crappy (or maybe decent?) options available - we didn't go into details. But he also has some taxable money invested in individual stocks. I shared my strategy, and he asked if he should sell his stocks and just get an index fund. If it was me, sure! But I said, I can't predict how your stocks will do, or whether they'll do better or worse than index funds. Just that the averages tell a certain story. His stocks have been doing well... he said this is the results over the past ~10 years:

APPL:  +114%; INTC + 67%; GE: +52%; PYPL: + 199%; NFLX: +23%; EBAY: +124%; DIS - 5%; BABA: +30%; YHOO: +351%

So almost all winners with good gains (although, if these are total gains stretched over 10 years, they actually wouldn't be that great! And I just realized that, so maybe I can get annualized gains from him and then compare...)

Anyway, lets say he had the above for just 5 years...
APPL:  +23%; INTC + 13%; GE: +10%; PYPL: + 40%; NFLX: +5%; EBAY: +25%; DIS -1%; BABA: +6%; YHOO: +70%

Overall, he's definitely beating indexes. So I guess the question is... over a long timeline, are these all likely to approximate the market average? Or eventually plummet?

Bobberth

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Re: how easy is it to beat the market average returns?
« Reply #24 on: April 25, 2017, 11:48:59 AM »
Not to disagree with the underlying premise, but, these numbers are taken from ALL funds. Many, many funds are not designed to beat the market. For one, index funds aren't designed to beat the market. Second, many funds that aren't index funds are not designed to beat the market. The index-fund-in-disguise that Edward Jones sells with a 5.75% load AND 1% OER, is NOT designed to beat the market in any way. It is designed to transfer wealth to the salesman and brokerage. All funds sold by insurance companies and sales based brokers fall into this category.

Also, don't forget that some indices are cap weighted, like the S&P 500. So not every year has 250 stocks above the average and 250 below it. Because of weightings, a handful of stocks can have an outsized impact on the index. Maybe 400 stocks are above the average but 100 are below it because of the weighting and vice versa. It would be interesting to compare active managers in years with more stocks performing above the average to years with less stocks above the average. Looking at the weights, it looks like Apple (#1) has as much weight as Microsoft (#2) and Proctor & Gamble (#15) combined right now.
http://slickcharts.com/sp500

AlanStache

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Re: how easy is it to beat the market average returns?
« Reply #25 on: April 25, 2017, 11:58:53 AM »
So I've been talking to a friend about this. He has most of his money in retirement accounts (401k and/or teacher equivalent?) with whatever crappy (or maybe decent?) options available - we didn't go into details. But he also has some taxable money invested in individual stocks. I shared my strategy, and he asked if he should sell his stocks and just get an index fund. If it was me, sure! But I said, I can't predict how your stocks will do, or whether they'll do better or worse than index funds. Just that the averages tell a certain story. His stocks have been doing well... he said this is the results over the past ~10 years:

APPL:  +114%; INTC + 67%; GE: +52%; PYPL: + 199%; NFLX: +23%; EBAY: +124%; DIS - 5%; BABA: +30%; YHOO: +351%

So almost all winners with good gains (although, if these are total gains stretched over 10 years, they actually wouldn't be that great! And I just realized that, so maybe I can get annualized gains from him and then compare...)

Anyway, lets say he had the above for just 5 years...
APPL:  +23%; INTC + 13%; GE: +10%; PYPL: + 40%; NFLX: +5%; EBAY: +25%; DIS -1%; BABA: +6%; YHOO: +70%

Overall, he's definitely beating indexes. So I guess the question is... over a long timeline, are these all likely to approximate the market average? Or eventually plummet?

assuming equal weighting that averages 106% return.  106% over ten years is a little over 7% annual return.  Sooooo.... yeah.....

« Last Edit: April 25, 2017, 12:00:47 PM by AlanStache »

neo von retorch

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Re: how easy is it to beat the market average returns?
« Reply #26 on: April 25, 2017, 12:08:10 PM »
Well, he didn't say "I bought these stocks 10 years ago, to the day." He said "these are stocks I've owned in the past 10 years." Though I think he said Yahoo was actually bought in ~2002/2003. So your assumption (and thus conclusion) is not correct ;)

AlanStache

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Re: how easy is it to beat the market average returns?
« Reply #27 on: April 25, 2017, 12:17:31 PM »
math is just never the best way to look at stuff :-)  yeah so he probably has done a bit better than the market average.  but was it better enough to justify the heart burn from the big swings in some of those?  I own zero individual stocks.

trollwithamustache

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Re: how easy is it to beat the market average returns?
« Reply #28 on: April 25, 2017, 12:22:45 PM »
So I've been talking to a friend about this. He has most of his money in retirement accounts (401k and/or teacher equivalent?) with whatever crappy (or maybe decent?) options available - we didn't go into details. But he also has some taxable money invested in individual stocks. I shared my strategy, and he asked if he should sell his stocks and just get an index fund. If it was me, sure! But I said, I can't predict how your stocks will do, or whether they'll do better or worse than index funds. Just that the averages tell a certain story. His stocks have been doing well... he said this is the results over the past ~10 years:

APPL:  +114%; INTC + 67%; GE: +52%; PYPL: + 199%; NFLX: +23%; EBAY: +124%; DIS - 5%; BABA: +30%; YHOO: +351%

So almost all winners with good gains (although, if these are total gains stretched over 10 years, they actually wouldn't be that great! And I just realized that, so maybe I can get annualized gains from him and then compare...)

Anyway, lets say he had the above for just 5 years...
APPL:  +23%; INTC + 13%; GE: +10%; PYPL: + 40%; NFLX: +5%; EBAY: +25%; DIS -1%; BABA: +6%; YHOO: +70%

Overall, he's definitely beating indexes. So I guess the question is... over a long timeline, are these all likely to approximate the market average? Or eventually plummet?

Or, your buddy just isn't telling you about his losers!

neo von retorch

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Re: how easy is it to beat the market average returns?
« Reply #29 on: April 25, 2017, 12:23:25 PM »
math is just never the best way to look at stuff :-)  yeah so he probably has done a bit better than the market average.  but was it better enough to justify the heart burn from the big swings in some of those?  I own zero individual stocks.

Right - personally I made a few thousand dollars day trading volatile tech stocks, but it was wildly stressful. Now I own zero individual stocks...

But I think in his case, owning individually stocks mostly in the 2009-2017 time period helps him feel like a superhero investor... because he hasn't really seen the kind of painful (downward) swings that dose you with heartburn...

Also - that's his list, including the Disney loser.

Mighty-Dollar

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Re: how easy is it to beat the market average returns?
« Reply #30 on: April 26, 2017, 03:39:02 AM »
If you listen to some people its just a matter of some quick research on mutual funds that have been outperforming the market over the last few years and presto
They are just plain wrong. The studies have shown that past performance gives you no advantage moving forward. Stick with index funds. The only way you can beat the market is to take more risk, which can backfire. Taking more risk of course does not involve skill. It's just gambling. http://investingadvicewatchdog.com/images/chart-active-manage.jpg

AdrianC

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Re: how easy is it to beat the market average returns?
« Reply #31 on: April 26, 2017, 11:26:29 AM »
   So I'm wondering just how easy or difficult it is to beat the average stock market returns on a consistent basis.
S'easy: dual momentum...

...running for cover.

AZryan

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Re: how easy is it to beat the market average returns?
« Reply #32 on: April 26, 2017, 01:28:19 PM »
If you listen to some people its just a matter of some quick research on mutual funds that have been outperforming the market over the last few years and presto
They are just plain wrong. The studies have shown that past performance gives you no advantage moving forward. Stick with index funds.

It's funny, but I've beat the market by technically doing what rob in cal said, and what Mighty Dollar said (in attempt to refute rob).

I've written it several times here already... just overweighting the Mid Caps at all is all it takes to beat the market typically over short, medium and long terms. I'm 60/30 Mid/Total (VIMAX/VTSAX) (and 10% in 3 tech funds that also very much beat the market -PRMTX, PRGTX, and FBSOX).

But I'd be fine with just 60/40 Mid/Total. I really feel like 100% Mid Caps would be even better, but I'll leave it where it is. I would cost too much to change it.

That's as much a 'set it and forget it' allocation as 100% Total Market, or 60/40 Total Market Stocks/Bonds, or any lazy target-date fund.

The volatility and fund cost is super negligible for the upside benefit of the past decades. Since Mids typically crash a little harder (but have recovered just as quickly as the rest of the overall market), the volatility has actually been a benefit. Several times I've shoved extra money in when there was a clear drop. Last time I did it was early in '16.

A lot of other people here did the same thing, but they put it in the Total Market (or 500 Index) instead. We all got 'wins' from that, but putting it in the Mids did do a bit better -which kinda made up for the past 3 years being about the only timeframe where the Mids actually lost to the overall market.

Long term, I'm way ahead. And I say that only for other people to consider doing the same.

SeattleCPA

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Re: how easy is it to beat the market average returns?
« Reply #33 on: April 27, 2017, 07:21:23 AM »
If you listen to some people its just a matter of some quick research on mutual funds that have been outperforming the market over the last few years and presto
They are just plain wrong. The studies have shown that past performance gives you no advantage moving forward. Stick with index funds.

It's funny, but I've beat the market by technically doing what rob in cal said, and what Mighty Dollar said (in attempt to refute rob).

I've written it several times here already... just overweighting the Mid Caps at all is all it takes to beat the market typically over short, medium and long terms. I'm 60/30 Mid/Total (VIMAX/VTSAX) (and 10% in 3 tech funds that also very much beat the market -PRMTX, PRGTX, and FBSOX).

But I'd be fine with just 60/40 Mid/Total. I really feel like 100% Mid Caps would be even better, but I'll leave it where it is. I would cost too much to change it.

That's as much a 'set it and forget it' allocation as 100% Total Market, or 60/40 Total Market Stocks/Bonds, or any lazy target-date fund.

The volatility and fund cost is super negligible for the upside benefit of the past decades. Since Mids typically crash a little harder (but have recovered just as quickly as the rest of the overall market), the volatility has actually been a benefit. Several times I've shoved extra money in when there was a clear drop. Last time I did it was early in '16.

A lot of other people here did the same thing, but they put it in the Total Market (or 500 Index) instead. We all got 'wins' from that, but putting it in the Mids did do a bit better -which kinda made up for the past 3 years being about the only timeframe where the Mids actually lost to the overall market.

Long term, I'm way ahead. And I say that only for other people to consider doing the same.

AZRyan, we are maybe using a different definition of "beating the market." Beating the market, to many, means within the asset class or subclass, your portfolio return consistently exceeds the class or subclass average.

E.g., if I invest in S&P 500 index and then you invest in small cap stocks, over time (probably a long time), your portfolio will beat the index and best my returns... but that's not necessarily you earning a premium over the average... i.e., that's not necessarily an alpha return.

The alpha return occurs when you actively invest within the S&P 500 and you consistently best the S&P 500 index... or you actively invest within the midcap or smallcap subclass and you best the relevant index.

Excluding the people who get paid to actively manage traditional asset class investment, I believe (but don't have objective data you cite) that the overwhelming majority of sophisticated investors believe the traditional asset classes are so efficient that active management fails as a strategy. Especially when you consider costs.

BTW, to show you that I'm more objective than you might think, good data suggests that in alternative asset classes, the capital markets aren't efficient and so some active investors are successful. But that approach, using alternative asset classes, opens up another can of worms. (If you're interested at all in how these approaches work, I'd recommend David Swensen's Pioneering Portfolio Management. You can also poke around my blog.)




redrocker

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Re: how easy is it to beat the market average returns?
« Reply #34 on: April 27, 2017, 07:38:42 AM »
If you listen to some people ...

People who have a book to sell you? Brokers who want your assets under management? Liars around the water cooler who want to impress you and inflate their ego but aren't telling you the full story?

If you haven't read A Random Walk Down Wall Street by Malkiel, I suggest you stop all investing activity (that isn't low cost index funds based, at least)  and slog through it.

UnleashHell

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Re: how easy is it to beat the market average returns?
« Reply #35 on: April 27, 2017, 08:05:44 AM »
Winners are easy to pick. I've done it.
BOA at $7 no problem


I also bought Lehman bros.....



I did beat the market for a while but the work involved wasn't worth it. I had the time when i was out of a job for 5 months.
I now have a job and it pays better than stock picking  (btw most of the time was spend rejecting companies )
plus i get a 401k and put the money into.... index funds.
« Last Edit: April 27, 2017, 08:07:17 AM by UnleashHell »

Proud Foot

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Re: how easy is it to beat the market average returns?
« Reply #36 on: April 27, 2017, 10:49:34 AM »
It's extremely easy. Hedge fund managers consistently beat the market and they tend to be stupid and uneducated.

You're joking, right?

P.S. The Economist reports on the median hedge returns each week (along with other asset class median returns).

No I'm deadly serious. Hedge funds tend to take the dumbest people available and pay them millions of dollars per year. They also always beat the market. Have you seen Buffet's bet against the hedge fund managers. Those hedge fund managers are absolutely destroying the market. Buffet has lost that bet for sure.

Are you sure about that?
http://fortune.com/2017/02/25/warren-buffett-scorches-the-hedge-funds/

I'm pretty sure that is a fake news site. That Buffet guy has no idea what he is talking about.

and we have found the troll

They probably are a troll but I would agree that the hedge fund managers destroy the market.  Take a 2 and 20 fee structure and add a 2 year lockup plus redemption fees and they will always make money.  Now the funds they manage on the other hand is a different story.

AZryan

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Re: how easy is it to beat the market average returns?
« Reply #37 on: April 27, 2017, 10:53:45 AM »
SeattleCPA,

I don't think many (any?) others here consider 'beating the market' to mean 'within the class or subclass average.' And you won't find people here discussing the alpha return, the beta, the subclass avg., etc. None of that is necessary to keep it simple, buy n' hold Index investors.

If the news says 'The market was down today', we all know what that means. 'The Market' is the Total U.S. Stock Market (basically identical-enough to the S&P 500 and similar-ish to the Dow) and the core fund almost everyone here has, recommends, assumes people are talking about if you say 'stocks' (along with Total Intl. Market) -incl. the advice MMM has always preached.

That's why the rare person who posts 'Time to get into Oil!... Health Care!... Banks!... Emerging Markets!... Tesla!... Netflix!... gets no traction here.

Most investors don't beat the market simply because they own bonds to lower volatility, but no one expects bonds to beat the market (long term), so we can all reasonably assume 'beating the market' is talking about 'within my stock allocation'.

If I would've promoted say... the T Rowe Price Media-Telecom fund I'm in, it would be easy for people to counter, 'Yeah, you beat the market, but you have NO idea if that'll keep going. We could see another tech crash like in 2000. That's why the rest of us just own the total market and don't try to pick the winners.'

But what I was saying is that 'owning the total market' is mostly just owning the very top MEGA GIANTS (like ~150 companies with something like ~80% of the money). You own little else of everything else... so you might consider over-weighting yourself in MidCap Blend (my advice) or SmallCap Value (the article's advice from this thread)
https://forum.mrmoneymustache.com/investor-alley/why-vanguard-total-stock-market-isnt-the-best-fund-in-the-fleet/, or both is plenty smart and even more diversified, too.

You'd still be 100% in low cost Indexes where you're still not picking winners any more than someone in the Total Market/500 Index. I'd argue even less so, really -since Apple, Google, etc.'s futures are much less critical to me than someone only in the Total Market/500.

You'd safely, reasonably, mostly keep following the overall market... but you'll probably beat it.
« Last Edit: April 27, 2017, 11:09:43 AM by AZryan »

SeattleCPA

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Re: how easy is it to beat the market average returns?
« Reply #38 on: April 28, 2017, 07:18:30 AM »
SeattleCPA,

I don't think many (any?) others here consider 'beating the market' to mean 'within the class or subclass average.' And you won't find people here discussing the alpha return, the beta, the subclass avg., etc. None of that is necessary to keep it simple, buy n' hold Index investors.

If the news says 'The market was down today', we all know what that means. 'The Market' is the Total U.S. Stock Market (basically identical-enough to the S&P 500 and similar-ish to the Dow) and the core fund almost everyone here has, recommends, assumes people are talking about if you say 'stocks' (along with Total Intl. Market) -incl. the advice MMM has always preached.

That's why the rare person who posts 'Time to get into Oil!... Health Care!... Banks!... Emerging Markets!... Tesla!... Netflix!... gets no traction here.

Most investors don't beat the market simply because they own bonds to lower volatility, but no one expects bonds to beat the market (long term), so we can all reasonably assume 'beating the market' is talking about 'within my stock allocation'.

If I would've promoted say... the T Rowe Price Media-Telecom fund I'm in, it would be easy for people to counter, 'Yeah, you beat the market, but you have NO idea if that'll keep going. We could see another tech crash like in 2000. That's why the rest of us just own the total market and don't try to pick the winners.'

But what I was saying is that 'owning the total market' is mostly just owning the very top MEGA GIANTS (like ~150 companies with something like ~80% of the money). You own little else of everything else... so you might consider over-weighting yourself in MidCap Blend (my advice) or SmallCap Value (the article's advice from this thread)
https://forum.mrmoneymustache.com/investor-alley/why-vanguard-total-stock-market-isnt-the-best-fund-in-the-fleet/, or both is plenty smart and even more diversified, too.

You'd still be 100% in low cost Indexes where you're still not picking winners any more than someone in the Total Market/500 Index. I'd argue even less so, really -since Apple, Google, etc.'s futures are much less critical to me than someone only in the Total Market/500.

You'd safely, reasonably, mostly keep following the overall market... but you'll probably beat it.

So maybe we don't disagree much... except maybe (or maybe not?) about the standard definition of phrase, "beating the market." I hear "beating the market" and I assume someone means using active management approach (so not passive investing) to beat the index the passive approach will use.

The apples to apples thing gets really important here with the definition I'm using. I.e., if one is talking about skill to beat the comparable index, you need to be comparing someone's active management of a, say, US stock portfolio to the equivalent index. Otherwise, the differences in performance may have nothing to do with investor actions...

BTW, totally agree that different asset allocation formulas will produce different results. E.g., a 60%/40% US stocks/US bonds delivers different returns than 100% US stocks. (Probably a lower return but you can look at time frames, I'm sure,where the bonds boost returns.)

Also, I don't try to tilt or overweight small or midcap stocks or international stocks, but I'm fine if people want to do that. (I am a little suspicious when financial advisors do this because I worry they're asking client to bear more risk to get a higher return... and then charging a fee for the higher return... but, again, not a big worry or gripe...)

Also, sounds like we may both think that there are better asset allocation formulas that 100% to US stock market because other formulas can dampen risk and boost return... (FYI, I use David Swensen's allocation from Unconventional Success.)


boarder42

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Re: how easy is it to beat the market average returns?
« Reply #39 on: April 28, 2017, 09:08:41 AM »
super easy.

Get a team of python scripters who understand the stock market and have them write scripts for bots to actively trade at the nanosecond level to harvest gains. 

You're gonna need a lot of computing power liquid cooled and a pile of cash but it can be done look at Tradebot.  Based out of KC they are one of the largest high volume traders out there.

Oh and you're going to need to keep everything on the latest cutting edge so you can be as fast as possible.  likely gonig to need some data centers near the stock exchange to eliminate latency.  oh and you're not gonna want to use fiber b/c it really slows down the speed of light too much you're gonna want to have your comms between your mainframe and the exchange go over the air. 

Tyson

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Re: how easy is it to beat the market average returns?
« Reply #40 on: April 28, 2017, 10:20:53 AM »
super easy.

Get a team of python scripters who understand the stock market and have them write scripts for bots to actively trade at the nanosecond level to harvest gains. 

You're gonna need a lot of computing power liquid cooled and a pile of cash but it can be done look at Tradebot.  Based out of KC they are one of the largest high volume traders out there.

Oh and you're going to need to keep everything on the latest cutting edge so you can be as fast as possible.  likely gonig to need some data centers near the stock exchange to eliminate latency.  oh and you're not gonna want to use fiber b/c it really slows down the speed of light too much you're gonna want to have your comms between your mainframe and the exchange go over the air.

Right, you could do all that.  Or, you could just listen to thorstach and crush everyone!  https://forum.mrmoneymustache.com/investor-alley/top-is-in/

Random guy on internet advice FTW!!!!!!

boarder42

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Re: how easy is it to beat the market average returns?
« Reply #41 on: April 28, 2017, 11:26:32 AM »
super easy.

Get a team of python scripters who understand the stock market and have them write scripts for bots to actively trade at the nanosecond level to harvest gains. 

You're gonna need a lot of computing power liquid cooled and a pile of cash but it can be done look at Tradebot.  Based out of KC they are one of the largest high volume traders out there.

Oh and you're going to need to keep everything on the latest cutting edge so you can be as fast as possible.  likely gonig to need some data centers near the stock exchange to eliminate latency.  oh and you're not gonna want to use fiber b/c it really slows down the speed of light too much you're gonna want to have your comms between your mainframe and the exchange go over the air.

Right, you could do all that.  Or, you could just listen to thorstach and crush everyone!  https://forum.mrmoneymustache.com/investor-alley/top-is-in/

Random guy on internet advice FTW!!!!!!

thanks for this.  i will add it to my daily humor thread.  see how long this one lasts. wonder when he'll report the triple top.  i personally sell everything after a quitupillion top.   hasnt happened yet since the market started but i think we gotta chance now..  4/100000000th of the way there.

AZryan

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Re: how easy is it to beat the market average returns?
« Reply #42 on: April 28, 2017, 12:28:44 PM »
SeattleCPA,

Yeah. Sounds like we mostly agree. The only thing I'd add is that when you define something and exclude things that technically fit, that's a problem IMO.

I think when people are casually talking about beating the market, they mostly just want to conclude with 'did you make more money than just blinding following the Total Market or not?'.

I'd say that very often implies active investing, but not 100% and it doesn't have to. Maybe because most people think it has to mean active investing, it's good that I keep pointing out there are some other Indexes that are rarely mentioned options that back-testedly kick ass.

Then again, we could argue that picking any other stuff at all is some form of active investing.

If there's a passive/active scale and 'just buy VTSAX' is near the bottom, and day-trading random stocks is near the top, then overweighting MidCaps and/or SmallCaps, and/or adding a Value (or Growth) tilt is at least a little more active than just owning VTSAX.

It's like 'market timing'. Most here think we don't do it... but really, we all do. We think the market's lower now than it will be later -that's 'timing'. That's exactly what day traders think, too.

The difference is the length of time to our guesses -ours is usually "I'll probably be up in 5 years; 10 for sure." vs. "This'll be up later today" or next week, or ~a month. But the market could start sinking long term and never stop making us wrong, but the day trader get their 'win' and be right.

The other diff. is the specificity of the guess -The Total U.S. Market vs. Tesla, N'Flix, Amazon, Apple, etc.

My MidCap Index pitch is specifically picking ~350 LargeCaps and MidCaps. And the Total or 500 Index is actually mostly picking the top ~150 MegaCaps (which I think a lot of people don't 100% realize).

Is someone picking the Total Market 'picking winners' more than someone split between MidCaps and the Total Market? I think it's 'yes' (but plenty willing to be proven wrong).

Many here think the whole U.S.market is too narrow a choice (and I'm kinda showing how it is because of the MegaCaps) so they solve it by having the entire World Index. But that's still kinda doing the same thing -mostly picking the top MegaCaps -just over the most diverse 'region' (all of Earth).

It's only because it seems silly to call a decade or more 'timing' and that picking a few big funds still seems pretty passive that we don't say we're all technically market timers and active investors.

AlanStache

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Re: how easy is it to beat the market average returns?
« Reply #43 on: April 28, 2017, 02:40:05 PM »
AZryan: Am to lazy to open a new google tap but do you know the private sector percent of GDP that the MegaCaps represent domestically/internationally?  I mean if the 150 MegaCaps represent 90% of privet sector US GDP then I am willing to round up and call that the 'total' market. 

But interesting points all around in this thread . 


ChpBstrd

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Re: how easy is it to beat the market average returns?
« Reply #44 on: April 28, 2017, 04:05:13 PM »
Goal: beat S&P500

Strategy:
Sell an in-the-money cash-secured put on SPY, an ETF with a 0.09% annual fee and excellent options liquidity. Today's price: 238.08. Option strike: 240. Date: May 26, 2017. Option premium (last): 2.96. This ties up 24,000 for every 1 contract.
One of two things will happen:

  a) SPY is at or below 240 on May 26: You are assigned shares at 240 each, for a net outlay of 240-2.96=237.04. You will have already performed better than if you had bought SPY today for 238.08 and beaten the index by 1.04/238.08=0.04%, or 3.36% annualized. This is true whether SPY goes up or down. Hold, sell and repeat, or switch to selling covered calls at this point.

  b) SPY is above 240 on May 26: The options you sold expire worthless. You keep the 2.96, an annualized ((365/28 days*2.96)/240) yield of 16% on the cash you tied up, which will beat the S&P 500 in most years. Repeat the process monthly until you are assigned. Hold, sell and repeat, or sell covered calls at that point.

You still lose money if SPY goes down, but the option premium reduces the loss. You're permanently ahead of the index regardless of outcome. Plug in your trading costs to find the exact yields at your scale, but if you're using an online brokerage you're probably still far ahead.

It only takes a calendar reminder and 10 minutes a month to execute this strategy.

AZryan

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Re: how easy is it to beat the market average returns?
« Reply #45 on: April 28, 2017, 07:50:12 PM »
AlanStache,

A CNN article from Feb. said the S&P 500 was $20T, and just the top 10 was $4.56T. That's 10 companies having close to 25% of all the money.
http://money.cnn.com/2017/02/22/investing/biggest-ten-stocks/

A similarish article looks over the market cap of the whole S&P 500. More accurate than what I was remembering a bit wrong. But still showing a very bad concentration at the top...
http://www.marketwatch.com/story/i-dissected-the-sp-500-and-this-is-what-i-found-2016-05-09

Can't find the other article, but it was showing how this has gotten far worse the past couple decades.

So ~150 companies is not really 90% of the total market, but this shows why you can own the ~3,600+ total market, the S&P 500, or the 30 company Dow and it's all pretty much the same. Not cool when people think they own 'everything', but really have to hope the new iWatch is a huge hit.

Splitting the 'total market' with the MidCap fund gives you more like ~850 companies with money spread around a lot more evenly. You get a bump in the true LargeCap range, and the crazy MegaCaps get cut way down (like over 50% in my case).

Don't have more world market details, but those All-World Funds work the same way by market cap, so you get the same-ish result of that huge gravity suck at the top. You'll just replace this or that U.S. company with a Nestle, Samsung, Toyota, etc.

We're such a global market, IMO it's better to bet more evenly on more companies than focus on far fewer, but across the globe vs. the U.S. But I'd consider it perfectly reasonable to swap ~10-25% of a Total Market Fund with an all-World ex U.S. Index. You'll probably see almost no difference, but could be worse or better.

JoeBlow

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Re: how easy is it to beat the market average returns?
« Reply #46 on: April 28, 2017, 10:44:54 PM »
It's so damn easy that 99% of people who try, end up underperforming the market instead......happy hunting ;)

Maybe OP is the 1%.