For unsophisticated investors, timing the market tends to keep money on the sidelines during growth periods, eroding long-term returns. This is part of why it's considered an investing sin - "time in the market beats timing the market." Sophisticated systematic investors can probably get good results with certain momentum-based market timing strategies, but most of us aren't sophisticated systematic investors.
To go into further detail about systemic investing:
There have been experiments like the turtle traders ^ 1 who applied "trend following", used today by many CTAs on exotic markets. For this, an investor taught some people his strategy/rules, gave them his money and they've shined for 40 years. The fundamental strategy still works today (updated). Fundamentally, it's a method to ride momentum in different ways (e.g. crossectional.) Hedge fund managers like Rzepczynski, Cem Karsan, Alan Beer... Richard Brennan is the most insightful of them who shares his methods freely. N.b. trend following doesn't work well in stock markets, but flourishes in Mexican rate swaps, orange juice futures, London sugar... combined in ensembles.
Traditional value investors, building on the Intelligent Investor, have always done well over samples above a few years. (N.b. Warren Buffet hasn't been a value investor for a long time, because he has too much to manage. He was strongly inspired by Fisher's Common Stocks and Uncommon Profits, which gave us the concept of "growth stocks".) (N.b. 2, value investing ETFs are mostly terrible, fundamentally not investing in value stocks due to their structures.)
Carisle's Acquierer's Multiple is the most recent development in systemic value investing (he also runs an ETF or two along these lines). "Magic formula investing" even holds up too!
In the mining space, you also get discretionary (not purely systematic) investors like Rick Rule openly discussing their methodologies, successful for decades and decades.
Here’s an interesting paper ^ 2 (exec summary pages 5-6). Note that 70% of underperformance is due to investors withdrawing funds during times of market crisis. Fund fees also drive the majority of underperformance. N.b. most wealth managers can't legally follow such strategies because of the prudent person rule. They are legally forced to underperform typical indices - and the majority of research has focused on them, distorting the data pool.
> Traditional value investors, building on the Intelligent Investor, have always done well over samples above a few years.
From the last published interview with Benjamin Graham, author of II ("A Conversation with Benjamin Graham", Financial Analysts Journal, September-October 1976)
> > In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?
> In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.
Fun! I'll save your comment (and upvoted it). Curious to see where this rabbit whole goes. On another point, I'd like to suggest you reference as follows [1]. I found that syntax to be more prevalent on HN than ^ [2]. It's easier to parse, since you know it's separate from the sentence. Whereas if I write that I have a reference like ^ 3 then it is harder to see that ^ 3 is apart from the sentence or part of it.
[1] This part you did do that way, haha.
[2] I haven't done a formal count, but I'm sure some regex search engine will give you many hits if you search for \[[0-9]\].
The fact that you're being downvoted for factual contributions kind of explains why it's possible to beat the markets. Most people refuse to believe it.
No public strategies are going to beat the market by a huge amount, and having the discipline to execute them manually isn't easy, but it has been clearly shown to be possible.
Many public strategies beat the market by a reasonable amount; the consistent and disciplined application of them, however, is rare.
There is also a lack of consistency about what it is to "beat the market", in the world of clickbait headlines and armchair twitter dd - the benchmark each year (with hindsight) is the highest performing asset.
The dogma that it's impossible to beat the market is frankly weird at this point.
If the markets were truly efficient, randomly picking stocks would beat SPX ~50% of the time. Since markets are not super efficient, basic exposure to performance factors (small cap, value, momentum...) puts you at a fairly high likelyhood of beating SPX.
> If the markets were truly efficient, randomly picking stocks would beat SPX ~50% of the time. Since markets are not super efficient, basic exposure to performance factors (small cap, value, momentum...) puts you at a fairly high likelyhood of beating SPX.
This assumes that the expected return of a single, randomly-picked stock is symmetrically-distributed. It is not, single stock returns are highly skewed and "lottery like". Index returns come from the fact that a small number of stocks do exceptionally well, while most of them do poorly.
This becomes even worse if we talk about timing: stock returns come from relatively short periods of doing really well, if you miss that because you are out of the market for some reason, you lose out on the vast majority of the index return.
Sorry, I don't have specific sources to cite. This comes from stuff I've picked up listening to the Rational Reminder podcast (https://rationalreminder.ca/podcast-directory), which have very well researched episodes as well as guest interviews with leading academic finance researchers. I'll try to dig up the relevant episodes, which do cite sources.
Quote from this last one: "[...] around 40% of
the time a concentrated position in a single stock experienced negative absolute returns, in which case it would have underperformed a simple position in cash. And around 2/3 of the time, a concentrated position in a single
stock would have underperformed a diversified position in the Russell 3000 Index. While the most successful
companies generated massive wealth over the long run, only around 10% of all stocks since 1980 met the
definition of “megawinners”."
I've watched all of the videos on Ben Felix's channel and generally share his worldview. But I've been having some doubts about market efficiency and active investing being extremely hard.
There were 4 moments when I thought - I should buy this stock for some reason, e.g. after ChatGPT I thought about buying NVidia. But I decided to continue being a purely passive investor. Now I regret that decision because all of those stocks overperformed.
I also correctly guessed that 3 out of 4 stocks would underperform (TSLA was the wrong call). It seemed obvious that the market was dumb about GME, AMC and TLRY.
Sure, many active investors are extremely sophisticated but what if the average invested dollar is kind of stupid?
Also, one minor nitpick about Ben Felix's content is focus on historical statistics. I think this gives you a false sense of confidence and security.
efficient markets will be a myth for as long as retail investors are allowed to trade stocks.
The stocks you are looking at are all stocks that have been popular with retail investors, and retail, as a general force, isn't out there doing equity research, incorporating all available information, estimating risk, and allocating its portfolio along the efficient frontier. Retail investors move the market, and there is money to be made if you can quantify how much of that move is driven by short-term sentiment.
That said, the market can remain irrational longer than you can remain solvent, sometimes "irrational" positive sentiment is coincidentally well-placed, and irrational sentiment is contagious and difficult to see through sometimes. Because of these factors, IMO any kind of active investing strategy should come with some kind of risk management component, where if your active bets blow up, you don't lose your life savings. Personally, I keep active bets to <20% of my portfolio, I'm extremely careful with leverage (margin, options, futures), and I put stop-losses on any particularly volatile position and any that incorporates leverage. I want to have it so if I'm dead wrong and also I fall into a coma and can't unwind my trade, my position still can't screw me.
And who is arguing that they are perfectly efficient? Markets work on information, which is not (initially) evenly distributed and because of the physics can only spread at the speed of light once it is known.
> Since markets are not super efficient, basic exposure to performance factors (small cap, value, momentum...) puts you at a fairly high likelyhood of beating SPX.
Two of the proponents efficient markets explain why (and shared a Nobel for the work):
> The dogma that it's impossible to beat the market is frankly weird at this point.
I agree.
Meta was literally priced below $90 not even a year ago (I entered at about $100 FWIW, which was my nice and round number). Now at $315. Anybody who believes the market is efficient is on some serious drugs.
The market correctly valued Meta a $380 or so before the crash (because "TINA" I'm supposed to believe), then correctly valued it a few months later at $100, then now is again correctly valuing it at $315?
Please. Just please.
I'll go much further: none of these valuation are correct. The market is highly inefficient.
Then Meta announced they were going all in on the Metaverse, had set fire to $100bn so far and were going to continue to throw ~$20bn a year into the Metaverse - the market correctly valued Meta a $100.
Meta announded they were going all in on the Ai - the market correctly valued Meta at $315.
You have picked a poor example; the moves in the stock, are primarily the fault of themselves. Those that saw the emergence of Ai and Zuckerberg as one of the leaders in the space got a nice 3x. If it didnt happen, Meta stock would probably be worth about as much as MySpace.
fwiw I said they were going to zero when they rebranded to Meta. Turns out I was wrong.
Meta had about a zero percent chance of dying like MySpace. Meta has tens of billions of dollars of annual profits (2x of Walmart, amazingly, $30 billion vs $15 billion) near total dominance of social networking, mobile advertising, etc. MySpace had none of those.
This isn't an answer to the poster above. The point is Meta talking about putting all their annual profit on fire. That makes the stock useless for investors.
You've provided zero evidence for them being incorrect, though.
There's nothing wrong with 3x changes. A lot can happen in a year to diminish or improve a company's outlook -- even a large company. And yes, by 3x -- or even much more.
The onus of proof here is on you to explain why those don't reflect largely realistic estimations of NPV of future profits, and to explain why you think you have better information, experience and judgment than the market.
Usually what's meant is that it's impossible to beat the market over time. I also saw Meta completely oversold and bought in. As someone who follows tech, it seemed obvious to me that Meta's impending death was greatly exaggerated. The problem is, can I do that over and over across the entire market? Nope.
I think the reason why "you can't beat the market" is the simple fact that you are part of the market. If you are very, very good, such that any trade you make will always win, then the market just don't want to play any more. The feedback response from the market is extremely precise; do you make money or not? If you don't, you will change your strategy until you start making money or you just stop playing. The moment you start benefiting from some exploit, the market will immediately response to their loss by changing their strategy.
This is of course assuming that we are at a level playing field. I don't believe for one second that insider trading is not prevalent.
SPX index is also weighted (I think by companies market cap), which means some of the stocks have greater effect on the returns of the index. Also companies are periodically added/removed from the index as per their market cap which I think weeds out low performers without any bias that active fund managers/humans tend to have.
It doesn't count as beating the market unless if you're doing so due to skill. It's not particularly unusual to beat the market and come out of a casino positive. On the other hand, bragging about how good you are at slots, is what will get you "weird dogmatism."
This has been my experience too, I missed out more by being sidlined during good times than I saved. Personally as an engineering mindset person I am good at identifying likely failure modes of companies (i.e. reality) but rarely anticipate how much things will go up during good times which is more of a social phenomenon (hype).
Understanding potential failure modes for companies is a much more important part of credit investing (this is what I do for a living these days, though I've done equity investing as well).
Unfortunately a very large part of the credit universe is very difficult to access if you're a non-professional investor though.
It seems like identifying failure modes could work if you could model the likelihood of the company going bankrupt in a certain amount of time because even if the enterprise is working on failure mode, public markets have been popularity contests for a really long time.
For unsophisticated investors, timing the market tends to keep money on the sidelines during growth periods, eroding long-term returns. This is part of why it's considered an investing sin - "time in the market beats timing the market." Sophisticated systematic investors can probably get good results with certain momentum-based market timing strategies, but most of us aren't sophisticated systematic investors.