I recently read a great book called Winning the Loser’s Game by Charles D. Ellis. In the book, he spoke out against the retail stock market investor. Retail investors are those people who aren’t professional investors. You have some other career that doesn’t involve investing and even if you’re a financial advisor, you’re most likely closer in behavior and resources to a retail investor than you are a professional.
In his book, backed up with mountains of academic studies, Charles Ellis lays out some of the reasons why retail investors are, in most cases, coming to the stock market with a pile of cash and giving it away.
You May Not Be Smart or Experienced Enough
Somewhere along the way, probably at the expense of computers and the ease of trading, hoards of retail investors thought they could set up an account at a discount broker, throw some money at the stock market and get rich. If it were that easy, why do financial advisors average $200 per hour and why isn’t everybody making big money as investors?
The reality of the markets is not good. First, you can’t beat the market. Professional investors can’t beat the market because they are the market. They are responsible for 90% of all trading compared to the collective force of retail investors who trade a mere 10% of the volume.
You can’t beat them because they’re more experienced at what they do, they pay billions of dollars for research every year which is quickly made public and priced in to the stock, and their average of 20 years of overall market knowledge and Ivy league finance education would embarrass you. Still, they can’t beat the market. If beating the market is your core investing strategy, you better do some major rethinking. You can join them but you can’t beat them.
Your Timing Is Probably Worse Than You Think
According to Ellis, all of the market gains over the past century are confined to a relative small amount of days. Ellis shows in one striking example that when the 10 best performing days are removed from returns from 1980 to 2008 an astonishing 17% of returns are eliminated. If the 30 best days are removed, say goodbye to almost 40% of the returns.
In the past 75 years of investing ALL of the stock market returns in the S&P 500 came from just 60 months or 7% of the 800 months. If you’re one of those people who tries to jump in and out of the market at the best times, do you really think you’re good enough to catch the 10 best performing days or the top 7%?
You’re Probably not THAT good of A Researcher
Where do you get your information when you’re researching stocks? The internet? Ask a professional the same question. They’ll tell you stories of the lunch they had with the company’s executives or the satellite imagery they used to count the cars in the parking lot of Walmart for hundreds of business days in hundreds of locations.
Give famed professional investor David Einhorn a call and ask him about his research. In a recent analysis of Green Mountain Coffee, he presented a 110 slide power point presentation that included an analysis of their patents, interviews of former employees, SEC filings, and an analysis of the profitability of different types of coffee filters. And you did an hour of internet research?
Is There No Hope?
Retail investors hold as their main strategy the idea that they’re going to beat the market. They try to buy low and sell high, they day trade, and they spend their days piling up embarrassingly high amounts of tax liability and trading commissions trying to reach a goal that is unattainable in terms of building wealth. You can’t beat the professionals. Heck, the professionals can’t even beat themselves!
How do you win? You put together a balanced portfolio based on sound strategy that doesn’t involve trying to outsmart the market. It relies on constant long term growth. Then, you leave it alone and you make changes when something substantial changes. You rely heavily on the dividends that come with stocks and bonds and you pay careful attention to the fees you’re paying in each of your investing activities. You’re smart enough to be a winning investor but you’re probably not smart enough to beat the market.
Still not Convinced?
Think about the world’s most successful investors in terms of net worth. How many of those claim to have made their money by short term trading? There are always exceptions and there exists the camp that says buy and hold is dead but maybe it’s time that the investment community asks for confirmed financials from the short term trading proponents who spend so much time promoting their strategies and blogs. “Show Us the Money!”