Portfolio managers are employed full-time at managing money and they can’t beat the market BEFORE FEES. Very few portfolio managers beat the market each year. The number grows smaller when you evaluate portfolio managers over two years. With each additional year, the number beating the market gets smaller and smaller. If you add in the fees that those money managers charge, they lose money.
It’s unlikely someone new to investment would have a chance to beat the market. A new investor beating the market would be like someone who just picked up a golf club beating Tiger Woods in 18 holes of golf. It would be lucky if that person would beat Tiger on even a single hole.
Most people trying to beat the market try to “trade themselves to success”. With each successive trade there is always the high possibility of buying or selling the wrong stock or buying or selling at the wrong time. The more trades, the more likely they will trail the market, possibly even losing a significant amount.
Here are a few of the issues with trying to beat the market:
- The more someone trades, the more taxable transactions they have. This means if you made money on a trade, Uncle Sam is going to take their tax cut whenever you have a gain and that means you have less to reinvest. The less you have to re-invest, the more you have to make when you do get a gain.
- The market has a lot of intelligent people all trying to beat the market. So, it is real competitive. It is so competitive that professionals can’t even come out on top.
- Quality stocks sometimes get out of favor in the market. If you own that stock and it’s down, it pulls you further away from beating the market, but maybe next year, that stock triples. Next year, it will help you beat the market. Although this only works if you didn’t sell it when it was down!
Great returns can be made. They may not beat the market, but they can come darn close to it. By minimizing fees, investing long term (I’m talking years!), not trading, buying when stocks are cheap, buying quality companies with good financials (Yes, they have to have earnings.) and solid market shares, investors can come out on top.
Many think the key to beating the market would be a lot of activity. Activity often works against you. Owning quality companies long-term is where the real action is. And… you can get reasonably close to the market return, although beating the market is always difficult. Many professionals who try to beat the market will end up with returns that trail a long-term holding approach.
Be smart, be well-read, be aware and be successful.
“Those who keep learning, will keep rising in life.”
- Charlie Munger
