The Myth of “Beating the Market”

Everybody wants to “beat the market”, and all fund managers assure you they will do so with the funds you place with them. Very few people, fund managers included, actually beat the major benchmark indices on a consistent basis.

While fund managers promise to “beat the market”, by the time management fees come off, (which usually apply whether the fund makes you money or not), most funds fail to do so.

Fund managers for the most part function as a herd: they keep their jobs by doing the same thing as everybody else. The fund manager who sees trouble on the horizon and pulls all his customers out of the market and into cash, but misses the last 10 or 20 percent of a move up faces a wave of redemption requests and may get fired. The rest of the fund managers who rode off a cliff along with everybody else will be secure in a job as long as their losses were in line with everybody else.

As long as the group maintains the same level of homogenous underperformance, jobs are secure, management fees will be collected, and quite possibly: bonuses will be awarded. The guy who was out early and missed the last upleg of the move may now look like a genius, but he probably got fired.

The other side of the beating the market myth is that you may not need to

If you put your money into the market at or near a secular or generational low, or anywhere along the ascent of a secular uptrend, then you don’t need to beat the market in order to garner reasonable return on your investment over the long haul.

If, you are not a professional.

If, you have a long term mindset.

If, you are looking at a market that has obviously overcorrected to the downside and permeated by fear
and finally,

If, you can make the admission to yourself that you probably can’t “beat the market” returns.

Then… you could simply “buy the market” by investing in major indices, and do very well on your investment over the long term.  Think 1984 – 1999, 1946 – 1962. (Having said this, keep in mind that this writer believes we are not in a secular uptrend now.)

The ironic thing about this strategy is that by aiming for completely average market returns, by in effect “buying the market”, you may very earn superior returns to the majority of investors who are trying to beat the market through stock selection and mutual funds.

However, most people simply cannot do this. As a general rule, everybody thinks they are of above average intelligence. While everybody else cannot beat the market, surely we can.