Why is it so hard to beat the market?

Discussion in 'Trading' started by stocktrader3429, Dec 26, 2006.

  1. Here's the thing. I don't understand why it's so hard to beat the market. When I go online at some of these financial sites like Forbes or Kiplinger, they are impressed with 20% per year return on their investment.

    I'm not a trader. I invest for the long-time, usually no more than a year. And the only reason I stick to a year is because of tax brackets. But if the stock isn't doing well, I tend to quit early and reap in the profits (or losses).

    So, I've been investing since Jan. 2005 and my performance last year was 31%, and my performance so far in 2006 is 37%. Based on the S&P 500 YTD return of 14.9%, I'm doing really well.

    However, I didn't find it difficult to beat the market at all. I started with $100K in investment with 10 stocks to diversify my portfolio. My portfolio has always held 10 stocks at a time, and I had to dump 1 one stock in 2006 because it wasn't moving up fast. If I had waited a whole year, it would've only gone up 15%, so I didn't make a bad bet. I also put a %T stop loss requirement.

    Going by this consensus, if you beat the market, you are supposed to be a rock star. I've been beating the market for four years (2 year paper trading, 2 years actual), and I've done well. I don't think I'm suited for day trading, so I'm happy with the returns.

    My strategies are very simple as well. I'm glued to the news and I tend to only invest based on fundamental analysis (P/E ratio, earnings growth, free cash flow, etc. etc.). I never believed in technical analysis because it seems to me that you are just smartly trying to gamble.

    I also read a lot of financial news sites and get my ideas from them. If they are pumping a particular company, I do my research and decide whether or not to invest. Before I invest, I thoroughly do my research on the industry, sector, company and competitors, but it's fairly normal.

    What I want to know is - is beating the market consistently really that difficult? And based on my performance, is there anything special that I'm doing, or have I just had luck on my side for the last four years?

    Thanks for your input.
  2. omcate


    Between April 2000 and October 2002, S & P 500 dropped by about 700 points. What will be your projected performance, if S & P tanks by 700 points in the next 30 months?

  3. I dont think it is that hard to trade longer terms for someone who is willing to do the work and has a sufficient sized account to trade and hold a portfolio of stocks. Intraday trading with a small account, on the other hand, is a bitch.
  4. It's not.


    (Your post was too long to read in it's entirety).
  5. Keeping it simple does have its benefits and rewards. Just remember two little factoids.

    We have been experiencing a great bull run the last few years causing the great majority of equities to significantly appreciate. And also usually fund managers cant just simply buy or sell a position, when they have hundreds of thousands of shares of a given stock and usually have allot more than just 10 stocks to manage.
  6. Wetton


    Do you think it had anything to do with a BULL market?

    No offense, but there's an old saying, "don't confuse brains with a bull market."
  7. Thanks for the replies. It may very well be related to a bull market, but I have held positions in a lot of industries. It can't be a bull market across all industries, could it?

    And in the last two years, since I have started real trading (15 positions in all), there hasn't been any significant announcements made in all those of companies, except for strong earnings. So I don't think I was betting on M&A or something really out of the blue to happen.

    I must also mention that my research entails thorough research. I don't buy unless I do research for at least 40 hours. And when I do hold positions, I start my day with news related to all of those companies and their respective industries.

    Moreover, if the market was bear, I think the companies with great performance will continue to perform well (maybe not at outrageous numbers, but still very well), and if I invest in the companies, I will do well. Not to mention, the requirements of beating the market will go down significantly as well.
  8. lindq


  9. In a bull market, most industries go up, yes.

    Your performance could simply be due to the fact that you have chosen high beta stocks. For example if you choose stocks with good growth prospects, or smaller cap stocks, these tend to outperform in bull markets and underperform badly in bear markets. A growth stock can be up 30% if the market is up 15%, but if the market is down 25% it can easily fall 50%, 60%, even if it is a rock-solid well managed company. And that is assuming no major deterioration in the company. As an example, Microsoft and Intel both had >50% declines during their high-growth phase *before* the 2000-2003 bear technology crash.

    The question is how much of your performance is down to genuine out-performance, and how much is down to having a higher-beta portfolio. The only way to know this is to look at how you did during meaningful market declines, as well as during good periods. For example, how did your portfolio fare during the June to August selloff this year? The market was down a tad less than 10% - how did your portfolio do from the market peak to the market trough? Or what about the runup to the Iraq invasion in early 2003? That was a bigger fall, what happened to your portfolio then?

    Once we get those answers, we can give you a better idea of how much your results are superior stockpicking versus just taking on more risk.
  10. My performance remain unchanged. The Q4 didn't add much value. The periods you mentioned didn't matter at all. I think the most value my portolio ever dropped was 3.5 percent after going up 17 percent.
    #10     Dec 26, 2006