I'll never know for sure, but it's a long run over eight years or so. I rarely buy shares in specific companies, and even more rarely sell, so I can see that they outpace the index funds I buy. I could be just lucky. I buy individual companies basically entirely based on reading the news, and if I'm reading it in the news, the professionals knew it long before I did.
I used to assume that if I read it in the news, it was all priced in and there was no point in me buying, but I noticed that often, it wasn't. Maybe I just got lucky and I miss the news reports on the companies that subsequently crash.
For example if you were closely following video game enthusiast press you may have found out a lot about Nintendo's mobile game plans much sooner than more typical investors which may only read newspapers such as the Financial Times and WSJ, which devote limited column inches to the activities of video game companies.
I have thrown a dozen or so darts, and my rate seems to be around 80%. But then, I'm not just throwing darts; I'm reading that companies are going to do better in the future and will see a rise in stock price, and it makes sense, so I sometimes buy them. Maybe I'm just the lucky one. I started with ARM a good eight years ago, when I read that they were going to do really well by supplying Apple. Of course, if I'd done the same thing with Imagination technologies 8 years ago, it would have been a less happy ending; I can only assume that the news I read at the time was more effusive about ARM.
Most recently (13 months ago - this isn't a regular thing), a British pasty retail outfit named Greggs. The news said things were looking good, I could see their stores were busy, I bought some shares, they're up about 40% in 13 months (which is unusually good, I freely admit, and I certainly didn't expect that). That's really all I do, and it seems to work out (and it really is rare when I do; typically, I just dump all my pennies into index funds - easily 80% of my pennies are in index funds). I think some of the big name successful investors do something similar, but obviously on a much grander and more informed scale. Plus the British house-builders. Every time the UK government announces another plan to help young people get fifty year mortgages, it's time to buy some more of them! They will crash eventually, I'm sure :(
> I have thrown a dozen or so darts, and my rate seems to be around 80%.
The odds of that happening by chance are <50% but still quite high, about 6-7% depending on exactly how you reckon it. So one person in 15 will get this result purely by chance.
There are studies that show that very few (like <<1%) professional money managers can beat the market consistently. You may well be one of those rare people, in which case you could make billions on Wall Street. But until you amass a much longer track record than you have, the odds are much higher that you are just one of the lucky ones. There are a lot more lucky people out there than most people realize.
As long as people don't mind me waiting 18 months between trades, and not trading amounts remotely large enough to have any effect on the market, sure.
Professionals do have a much harder job of it. As Simon says, they can't sit on their hands for 18 months like I do. I expect if they parked most of the money in an index fund, their customers would start asking why they're paying managed fund rates for an index fund.
Might as well go on the record here, and come back in a year to see how I did. I'm considering UK pizza chains and the like; as the UK gets poorer, and people have less money to spend, the money that used to go on eating out drifts downwards into takeaway pizza and the like. All the signs are that the people of the UK are going to have less money and be faced with higher prices, so I'll look for a pizza chain or similar to invest in.
Yea, all that's true, but Eli has a significantly easier job. A professional manager has to make a lot of decisions and still has to invest money even if they don't have any insightful ideas. On the other hand Eli will only invest if he gets a good idea, and if not, then no investment.
That's no excuse. Eli can always park his undeployed capital in an index fund. So if he can consistently pick winners 80% of the time he'll still beat the market even if he has fallow periods.
Excuse for not taking his (alleged) talent to Wall Street and making billions of dollars.
> it has nothing to do with my point
which was:
> A professional manager has to make a lot of decisions and still has to invest money even if they don't have any insightful ideas.
Implying that Eli's talents could not be deployed on Wall Street because he could not operate under the constraints on which professional money managers have to operate. But that's not true.
> I'm reading that companies are going to do better in the future and will see a rise in stock price, and it makes sense, so I sometimes buy them.
I think that way about my index funds too. But then it's impossible to know the reason for the price rise. Maybe it's because of millions of other guys like me who read the same articles, came to the same conclusion as me, and put their money in too.
A monkey throwing darts will outperform the market on average.
The monkey is giving even weight to each option rather than weighting according to risk. The monkey is picking a riskier portfolio than an index fund, and in compensation for accepting greater downside risk will have greater average returns.
Markets are subtle like that =)
Of course, the monkey is likely to attribute the difference to skill rather than risk...
Not sure I follow your logic:
1. What are you calling the market in your first sentence?
2. Why/how is an index fund somehow less risky? What is the fund indexing and how does that compare to the market in your first sentence?
In your scenario, if the index fund is properly designed to capture the risk of the "market" as you have defined it, a monkey has equal chance of performing better or worse than the index fund and the average monkey (or an average of a large enough set of monkeys) will perform with the index fund. Certainly, though, if your index fund is not designed to be reflective of the market, but of some subset, then it will carry different risk, but not necessarily less risk. However, a monkey randomly picking stocks from a pool will not, on average, outperform the average return of that pool of stocks.
An index fund is more likely to invest in BoringBigCo than NewShinyCo. The monkey is equally likely to invest in BoringBigCo and NewShinyCo. The latter strategy has more risk.
Good question. It actually doesn't have to be symmetric, it just has to be distributed in such a way that a random sample will not give you a biased return. (A symmetric distribution is sufficient but not necessary.) The reason this has to be the case is that if a random portfolio gave you a biased return, then the sum of random portfolios would give you a biased return. But the limit of the sum of random portfolios is the whole market, and that can't be biased.
Perhaps it's easier to see from the other side: the monkey is getting the same expected returns as "buy one of everything on your list," but the index fund is not, because the index fund is employing a different weighting strategy (e.g. buy the 30 or 500 largest companies). Of course, if you define "market" using the same list that an index fund uses, the monkey's expected performance converges with that of the index fund.
