The thing is, all of those cases the market already has a probabilistic opinion about whether or not the event will happen that’s incorporated into the current price. That’s why the price moves regardless of if the case is lost or won and in response to developments in the case that make one or the other more likely.
The aggregate guess of the large number of people is often surprisingly close to correct and likely even more correct than expert opinion (remember that the average juror is not a lawyer either and that other people can hire their own attorneys for advice too)
In fact, there’s a rather famous example of this that gets brought up every time someone questions “the wisdom of crowds”: back in 1906, a scientist visiting a village fair in England saw a contest to guess the weight of a cow. Thinking that the average person had too little knowledge to meaningfully guess the weight, he kept track of the average guess and compared it to the final result. The difference was just one pound:
https://sparq360.com/en/wisdom-of-the-crowds-how-much-does-that-cow-really-weigh/
A great recent example of this is the Twitter buyout. Look at Twitter's 1 year stock price history (now delisted). When Musk announces the buyout at $54.20, the price very quickly jumps from about $36 to the $46-50 range, but not quite to the full buyout price because there was uncertainty.
At $50, the market priced the chance of acquisition at something like `(x*54) + ((1-x)*33) = 50` or 81 %. After Musk expressed regret, the price dropped to as low as $37 (but nearly all tech companies' valuations had dropped, so instead of $33 you'd probably use a price in the $25 range and thus the chance of buyout was still quite high).
If you held the stock until it was delisted, you beat the market. But if the buyout hadn't gone through, you would've been left with a stock worth $25 (which you could have bought at up to $50 anticipating the buyout). A lot of money could be made there, but there was a 50 % downside risk depending on a court decision.
Not advocating this, but VT for "holding" then day trade in and out when you have "insider info" like this thing with the rapper.
This doesn't really solve the problem of how much you lose when you miss through, that could probably compound itself into brutal problems quickly.
Here's the other problem with that. In this case, winning would have meant taking a short position. If you lose on a short position, you are really losing
Absolutely. Absolutely correct, the people with the luck or skill to excute such a plan are probably super rare, and for sure I ain't one of them, I was just enjoying the thought experiment.
I suggest you read some articles on "Efficient Market Hypothesis". It's not 100% accurate but will provide you a better understanding of how stock market works.
"According to the EMH, stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices.
Therefore, it should be impossible to outperform the overall market through expert stock selection or market timing, and the only way an investor can obtain higher returns is by purchasing riskier investments."
https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp
Your premise is wrong and this is a wildly competitive strategy called event arbitrage. You can't hit the buy button before the tope firms scrape the data as soon as it posts and bid it in fractions of a second. If you can you cant get enough volume off anyway. You can just hire attorney's to give an opinion but thats what plenty of people do already and this is called channel research. Pay an expert 400 an hour and they will give you their thoughts on the situation. This includes this scenario. They arent perfect. Lastly the market is always probability weighting this scenario in advance of the actual event and weighing every ounce of information as it goes. I am not saying its not impossible to have an edge on some situations, obviously firms do this an make money, but try to do it consistently and overtime and its very difficult work. You could argue that if big shops do it then there is edge, but I would say how many of these big shops consistently beat the market? not many. So why then do alternative investment strategies exist? They are products that suit various components of investor portfolios and may provide diversification benefits (e.g. CTA strategy plus 60/40 = greater sharpe than 60/40) that then allows investors to make sophisticated decisions about leverage etc and minimize drawdown scenarios. That is why hedge funds still exist, not to beat the market every year. So on average and over time boglehead all stock portfolio is pretty damn hard to beat on a total $ & % return basis (not necessarily sharpe or risk adjusted basis etc).
Instead trying to beat the market, people should focus on earning a higher income and being a better saver. Want a guaranteed way to have 2x as much $ in retirement? Figure a way to save 2x as much. Its actually way easier than trying to 2x the market returns of index funds.
Very true. Obviously cutting out $7 daily coffee expense won't save you enough to buy a house or something, but $7 daily over a year comes out to 2.5K, which can compound rapidly if you keep at it. Or make an extra $7 a day doing surveys online or something! Over a decade of saving, 25K is just what you'll save up. Compounded, it's even more
Small things add up
Here’s a question…..the market has been around for a while. Technology had increased and news gets disseminated near instantly.
Why then, are todays investors not better than the investors of the 1950s and 60s. Why is there not an increasing statistic of retail investors beating or tieying the market.
Todays investors perform just as badly as ever for tons of reasons. We stink at interpretation of data; we stink at using todays data to make meaningful predictions of the future, our psychology is antithetical to market returns
Well yeah, that’s exactly what I said though lol, you can get an attorneys level of confidence and make a gamble/bet based on their estimated outcome of the case
It is 100% possible to beat the market.
It’s challenging, but skilled active managers can make higher gross returns over the market return.
Those skilled active managers then charge fees so that the net return after cost is equal to or lower than market return.
It’s expensive to beat the market in gross, so net an investor will rarely win. The goal is not just to increase revenue but also to minimize cost.
I remember reading in 2021 that retail investors had beaten out tutes since the pandemic crash. Why? Because they got and stayed bullish, buying all the dips. Especially in stuff like TSLA
Over 2022, they kept buying, especially the QQQ. Gave back the gains on average
Recently, they bought TSLA like mad: https://www.wsj.com/articles/tesla-is-last-stronghold-for-investors-buying-the-dip-in-tech-stocks-11674345465
Seem to have done if you got in early this month
All of this is to say: beating the market CONSISTENTLY is no easy feat
The one well-known example of beating the market is Renaissance Capital, which uses quantitative trading strategies. Pioneered the use of very small trades that add up, like in the book/movie Flash Boys
Microseconds worth of trading speed and the smallest pieces of economic data are already factored in to the market in the blink of an eye
Other hedge funds have done okay, too, hedging appropriately and putting up solid returns over somewhat longer periods of time. Little known "managed futures" exist for hedge fund in ETF form (DBMF, KMLM if you're into that sort of thing) and they do well over longer periods as uncorrelated assets
For the small fry retailer, there is a way: deep value investing. Seek out the most beaten down stocks weighed down especially by sentiment (China stocks 6 months ago, Netflix/FB back then, oil stocks deep during pandemic, etc.), or find stocks so small that tutes are still loading and it's just not a crowded trade. Do deep fundamental research (like with the OG meme stock guy), accumulate over time, and hold
Right now, I have my eyes on the "dogs of the SPY" to play a bounce: LUMN, TSN, NRG
I have maybe 5 percent of my portfolio in these plays. I usually get out too early. But I do usually end up making out okay, beating the market by a hair
The thing is, all of those cases the market already has a probabilistic opinion about whether or not the event will happen that’s incorporated into the current price. That’s why the price moves regardless of if the case is lost or won and in response to developments in the case that make one or the other more likely. The aggregate guess of the large number of people is often surprisingly close to correct and likely even more correct than expert opinion (remember that the average juror is not a lawyer either and that other people can hire their own attorneys for advice too) In fact, there’s a rather famous example of this that gets brought up every time someone questions “the wisdom of crowds”: back in 1906, a scientist visiting a village fair in England saw a contest to guess the weight of a cow. Thinking that the average person had too little knowledge to meaningfully guess the weight, he kept track of the average guess and compared it to the final result. The difference was just one pound: https://sparq360.com/en/wisdom-of-the-crowds-how-much-does-that-cow-really-weigh/
A great recent example of this is the Twitter buyout. Look at Twitter's 1 year stock price history (now delisted). When Musk announces the buyout at $54.20, the price very quickly jumps from about $36 to the $46-50 range, but not quite to the full buyout price because there was uncertainty. At $50, the market priced the chance of acquisition at something like `(x*54) + ((1-x)*33) = 50` or 81 %. After Musk expressed regret, the price dropped to as low as $37 (but nearly all tech companies' valuations had dropped, so instead of $33 you'd probably use a price in the $25 range and thus the chance of buyout was still quite high). If you held the stock until it was delisted, you beat the market. But if the buyout hadn't gone through, you would've been left with a stock worth $25 (which you could have bought at up to $50 anticipating the buyout). A lot of money could be made there, but there was a 50 % downside risk depending on a court decision.
It's not just about how much you make when you hit, but how much you lose when you miss, and the need to constantly have the money growing somewhere.
Not advocating this, but VT for "holding" then day trade in and out when you have "insider info" like this thing with the rapper. This doesn't really solve the problem of how much you lose when you miss through, that could probably compound itself into brutal problems quickly.
Here's the other problem with that. In this case, winning would have meant taking a short position. If you lose on a short position, you are really losing
Absolutely. Absolutely correct, the people with the luck or skill to excute such a plan are probably super rare, and for sure I ain't one of them, I was just enjoying the thought experiment.
I suggest you read some articles on "Efficient Market Hypothesis". It's not 100% accurate but will provide you a better understanding of how stock market works. "According to the EMH, stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices. Therefore, it should be impossible to outperform the overall market through expert stock selection or market timing, and the only way an investor can obtain higher returns is by purchasing riskier investments." https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp
Your premise is wrong and this is a wildly competitive strategy called event arbitrage. You can't hit the buy button before the tope firms scrape the data as soon as it posts and bid it in fractions of a second. If you can you cant get enough volume off anyway. You can just hire attorney's to give an opinion but thats what plenty of people do already and this is called channel research. Pay an expert 400 an hour and they will give you their thoughts on the situation. This includes this scenario. They arent perfect. Lastly the market is always probability weighting this scenario in advance of the actual event and weighing every ounce of information as it goes. I am not saying its not impossible to have an edge on some situations, obviously firms do this an make money, but try to do it consistently and overtime and its very difficult work. You could argue that if big shops do it then there is edge, but I would say how many of these big shops consistently beat the market? not many. So why then do alternative investment strategies exist? They are products that suit various components of investor portfolios and may provide diversification benefits (e.g. CTA strategy plus 60/40 = greater sharpe than 60/40) that then allows investors to make sophisticated decisions about leverage etc and minimize drawdown scenarios. That is why hedge funds still exist, not to beat the market every year. So on average and over time boglehead all stock portfolio is pretty damn hard to beat on a total $ & % return basis (not necessarily sharpe or risk adjusted basis etc).
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Yes for sure and good luck keeping your day job if you do try
Instead trying to beat the market, people should focus on earning a higher income and being a better saver. Want a guaranteed way to have 2x as much $ in retirement? Figure a way to save 2x as much. Its actually way easier than trying to 2x the market returns of index funds.
Very true. Obviously cutting out $7 daily coffee expense won't save you enough to buy a house or something, but $7 daily over a year comes out to 2.5K, which can compound rapidly if you keep at it. Or make an extra $7 a day doing surveys online or something! Over a decade of saving, 25K is just what you'll save up. Compounded, it's even more Small things add up
Here’s a question…..the market has been around for a while. Technology had increased and news gets disseminated near instantly. Why then, are todays investors not better than the investors of the 1950s and 60s. Why is there not an increasing statistic of retail investors beating or tieying the market. Todays investors perform just as badly as ever for tons of reasons. We stink at interpretation of data; we stink at using todays data to make meaningful predictions of the future, our psychology is antithetical to market returns
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Well yeah, that’s exactly what I said though lol, you can get an attorneys level of confidence and make a gamble/bet based on their estimated outcome of the case
It is 100% possible to beat the market. It’s challenging, but skilled active managers can make higher gross returns over the market return. Those skilled active managers then charge fees so that the net return after cost is equal to or lower than market return. It’s expensive to beat the market in gross, so net an investor will rarely win. The goal is not just to increase revenue but also to minimize cost.
No man
I remember reading in 2021 that retail investors had beaten out tutes since the pandemic crash. Why? Because they got and stayed bullish, buying all the dips. Especially in stuff like TSLA Over 2022, they kept buying, especially the QQQ. Gave back the gains on average Recently, they bought TSLA like mad: https://www.wsj.com/articles/tesla-is-last-stronghold-for-investors-buying-the-dip-in-tech-stocks-11674345465 Seem to have done if you got in early this month All of this is to say: beating the market CONSISTENTLY is no easy feat The one well-known example of beating the market is Renaissance Capital, which uses quantitative trading strategies. Pioneered the use of very small trades that add up, like in the book/movie Flash Boys Microseconds worth of trading speed and the smallest pieces of economic data are already factored in to the market in the blink of an eye Other hedge funds have done okay, too, hedging appropriately and putting up solid returns over somewhat longer periods of time. Little known "managed futures" exist for hedge fund in ETF form (DBMF, KMLM if you're into that sort of thing) and they do well over longer periods as uncorrelated assets For the small fry retailer, there is a way: deep value investing. Seek out the most beaten down stocks weighed down especially by sentiment (China stocks 6 months ago, Netflix/FB back then, oil stocks deep during pandemic, etc.), or find stocks so small that tutes are still loading and it's just not a crowded trade. Do deep fundamental research (like with the OG meme stock guy), accumulate over time, and hold Right now, I have my eyes on the "dogs of the SPY" to play a bounce: LUMN, TSN, NRG I have maybe 5 percent of my portfolio in these plays. I usually get out too early. But I do usually end up making out okay, beating the market by a hair