Published 01-09-2019 by Thomas Lyck
There are still those who believe it is not possible to achieve an above-average return on a consistent basis as all available information is already priced in. This idea could never stand up to critical thinking, though. Where there is an average, of course, there is also an above- or below-average level. And information is neither equally available, distributed nor understood. This much is self-evident. The idea is rooted in EMT (Efficient Market Theory), a theory which unfortunately was widely accepted for years, despite its obvious fallacies. Hundreds of investors disproved this theory long before it was formed in the first place, as the evidence of skill in the marketplace has been around for several centuries. The efficient markets theory basically teaches investors that it is not even worth to try and obtain better than average results. This thesis was formed contrary to clear and present available evidence, which is why Warren Buffett used the term “Flat earth society” when he wrote his epic essay “The Super-Investors of Graham-and-Doddsville” in 1984, which refutes EMT (available online). Of course, for an investor who knows what he is doing, it can even be to great advantage if many of his competitors don’t even believe in the concept of trying.
formulastocks.com has beaten the market over 75% of the time and managed a +90% historical win rate.
It is not uncommon for even novice investors to entertain the notion that they can beat the market without help, information, or guidance. More often than not, such a notion is wrong. Though it is, of course, possible to beat the market, it is by no means easy! In any one year, with a bit of luck certainly, but in the long run, it requires some form of informational advantage or uncommon skill. In 1945 Friedrich Hayek argued that markets are the most effective way of aggregating the information dispersed amongst individuals within a society. In fact, markets are reasonably good at accumulating information and may often arrive at a better idea of a proper price than the one held by an individual investor — unless, of course, this individual possesses relevant information not available to the masses, understands the information better, or has superior skill, as this reverses the entire situation 180 degrees.
If you want to beat the market without help, you should expect it to be a full-time occupation and to require practical education. If you — like most people — do not have the required time and resources, you should expect to have to enlist the help of additional information or technology. After all, as the saying goes:
“He who has the best information wins”
When entering into a trade, do you, the buyer, hold this information, or does the seller? If you have useful information or skills that the seller does not have, you are more likely to be holding the winning hand.
The other guys, your competitors in the market, also know how to read. And widely disbursed information has already been accounted for in securities prices. By the time you read that iGizmo is readying for stellar growth, its price will be as high, or higher, than the fundamental facts support. And information never travels directly to you; before it reaches you, it will have been acted upon by well-connected hedge funds that pay for early information, probably days before it reaches most investors. So if you follow the herd, you will have little upside (it has already been priced in) and much downside (the unexpected has not occurred yet, but it might), and you have just set yourself up for a fall: low reward, high risk. This is quite the opposite of what you want. Therefore, the only information that can help you out there in the market is information that is only available to a minority — information of which the majority is not (yet) fully aware. In fact, you are better off completely ignoring mainstream information. If not for this reason, then perhaps for the following:
It is the preferred human method of analysis: to absorb and understand stories. Our brains are simply better designed to respond to stories, among other things because they can evoke an emotional response, which we find pleasing. Our ancestors probably communicated vital information for survival via stories when gathered around a bonfire at night. The fact that the human brain is compatible with storytelling is one thing. It is quite another thing to argue that storytelling is correlated with positive future investment returns. Investing involves extensive deliberation, which cannot be embedded in a story. A story typically communicates an idea, based on exaggerated overreliance on very few parameters. It creates bias, and bias lowers investor performance. If you invest on the basis of a story, you are likely to achieve lower returns than if you invest on the basis the rational and objectively observed numbers and facts of the situation.
In the long run, you are not likely to perform better by trading in and out of stocks frequently. At least you won’t make as much money as you would have by simply staying put in the right place at the right time. Most traders end up with a much lower return than long-term investors, who have learned to be right and, not least, to sit tight. Each decision taken is as much a source of additional error as of potential profit. And quick decisions made by humans are by definition rough, biased, and emotion-based approximations, not objective, cool, rational, and detailed calculations.
“Put your money in the right place at the right time”
The most famous analogy is given by Jesse Livermore in “Reminiscences of a Stock Operator”. A character in his book, Old Turkey, tries to teach young Livermore a lesson about staying put in the market instead of trading in and out — a lesson he does not fully comprehend until many years later. Livermore concludes, “Nobody can catch all the fluctuations. … One of the most helpful things that anybody can learn is to give up trying to catch the last eighth-or the first. These two are the most expensive eighths in the world.” When he talks about expensive “eights”, he is referring to the fact that stock prices in those days were trading as fractions, and chasing them you would frequently be led astray. In today’s world, an “eight” should be substituted with perhaps two to five dollars, as today’s dollar is worth a lot less. Livermore ends up concluding, “Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money.”
See how we beat the market at https://formulastocks.com
P.S Happy new year! We’re stoked for 2019 after we just had yet another year where we beat both the market and average hedge funds.