I know why most retail investors fail to beat the market

Discussion in 'Trading' started by garfangle, Jun 6, 2010.

  1. The reason why most retail investors (RI) fail to beat the market (i.e., the major indexes) is because they actually listen to the advice of financial advisors and market commentators and follow what they say to their investment peril.

    The most basic advice given to retail investors is they should find companies that have strong brands and a long history of excellent performance and invest alongside them to capture their positive future returns. What this means in practice is that the RI buys at a relatively loft price (p/e wise).

    The advisor then says to hold onto the stock unless there is a fundamental change that adversely affects the future outlook of the firm, like increased competition or a negative change in customer buying habits. At that point, one should consider disposing that stock and find a better investment.

    However, by the time a retail investor finds out that the firm is no longer a wise investment the stock price would likely have fallen hard already. The RI is now faced with the prospect of selling at a low price because he is among the last to know that the firm is now in trouble.

    Therefore, the retail investor buys high and sells low, instead of buying low and selling high. He buys when a firm's prospects look good and sells when it looks bad just as he is told to do so by his financial advisor and in the end underperforms the market.
  2. As an investor, one of the hardest things to do is to buy good companies when you feel the worst about them. An extreme example would be DJIA under 7,000 a year+ ago.

    I'm glad that I'm no longer an investor :D
  3. NoDoji


    Do you ever see an all-time high or low for a stock and wonder who bought or sold at that price?

    Back in early March 2009 I called my friend who wanted to start swing trading in his retirement account and thought prices looked pretty darn good at that point and told him DRYS looked ripe for another ride (I'd traded it in our IRAs from Nov 08 through the trend breakdown in late Jan 2009 for a 4-bagger). He called me back that evening and said he picked up some DRYS for 2.73. I think he bought the all-time low :cool:
  4. Most fail because they are undercapitalized and cannot survive heavy deep volatility such as the flash crash and are easily prone to the power of suggestion from the TV pundits and are psychologically not capable of handling choppy markets. So they end up selling low/buying high etc..

    Most never do any research except listen to what the TV and neighbors say.
  5. "All time H/L" prints tend to beget more of the same. There are many equity funds that focus on stat-arb momentum strategies which buy the ATHs and short the ATLs on correlation.

    If I may ask... how do you get a 4-bagger out of shorting the stock?
  6. NoDoji


    I went long on 11/21/08 @ 3.48, not short. I held the position until the 1/22/09 gap broke the trend line, where I sold @ 12.80. OK, so I exaggerated, it was a 3.7-bagger :p

    It went into the 17.00's before the trend broke down, but I was trying to let the trend be my friend since it was a "long term" investment.
  7. Ahh, understood. I only saw the Jan reference and assume you had shorted it there.