Last week I posted a theory as to why most investors or traders under-perform the market, and how the Wisdom of Crowds plays a role. I was full of shit. Here is my thinking now. In the first place, I confused the total U.S. stock market with the S&P 500. Home bias is common, so it’s okay to exclude foreign stocks, but there’s no reason to exclude smaller-cap stocks. Currently about 4,000 companies are publicly traded in the U.S. They are best represented by the CRSP U.S. Total Market Index. The S&P 500 contains just 13% of the total. According to Goldman Sachs data, the average return over the past 10 years for the U.S. Total Market has been 9.2%. That of the S&P 500 has been 13.6%. The Total Market does worse because it includes lots of tiny companies on the verge of failing, whereas the S&P 500 has the advantage that laggards are continuously falling off and new leaders are being put on. To match the S&P 500 is actually to out-perform the total market by quite a bit. What then about the Wisdom of Crowds? My analogy last week was faulty. The Wisdom of Crowds pertains to guesses by individuals who don’t know anybody else’s guess. The individual guesser is far less accurate than the average of all guesses. Crowds, when their individual thinking is averaged, are smart. But in the stock market participants are constantly looking at “what other people have guessed” as reflected in prices. (The more people “guess” that a given stock should be bought, the higher that stock’s price.) Group think enters in. Crowds are smart but mobs are dumb. I had grabbed at the Wisdom of Crowds as an explanation of an anomaly which I no longer think exists. I was thinking, how can the average person come in below average? There’s nothing to be explained.
Well then maybe the way to beat the crowd/mob and indexes themselves is to find out (slight hitch, need an S&P insider for this) in advance the index changes.
absolutely agree that global markets are the future. years ago you had to do give ups to trade crazy markets. now it's all under one roof, just have to worry about the clearing firm running off with your money. it's a good thing most people lose cause i need the money, you should be giving them hope not depressing them. also your talking more like and investor and not thinking like a trader. trade the waves in and out up and down forget the love affair with an investment. get out of it what you can right now and move on to the next volatile market.
When you follow the herd like sheep, expect to be slaughtered like sheep. There is only 1 truism in the stockmarket which is the big boys (hedge funds, mutual funds, brokers, banks) run the show. You can combine all the monies of the legions of amateur retail traders and you cannot move most of the stocks in the stockmarket. Only the big boys, with their tens of billions of dollars move most of the stocks in the stockmarket. There are over 10,000 stocks in the US stockmarket alone. The only stocks retail traders can move are the penny stocks with very low floats in the hundreds of thousand shares. Of course, now you deal with pump and dump with your fellow retail traders. So, all the news, CNBC, Bloomberg, ET trolls spreading BS and disinformation are all designed to fleece you and take your monies. The maxim "the trend is your friend" comes to mind. Fight the trend as most retail traders do, and lose all your monies. Last thing. It is the big boys that set the trend and push stock prices higher or lower.
As for retailer, it's hard to beat the market, when ones skill level, is bellow - average. Beyond that, i see nothing hard in it.
One reason it takes so long to know you can beat the market is that chance and randomness dominate earnings (or losses) for a long time before whatever true edge you have shines through in the numbers. Plus if you continue to refine your system the early returns on equity aren't entirely applicable anymore. I keep hoping that my system has stopped evolving, but it keeps evolving. Hard to analyze performance on a moving target.
For ten years I held global index funds, and that served me well. Now I trade too frequently to be called an investor and too infrequently to to be called a trader! I am an in-betweener.