Can You Beat the Market?

I always liked it when Regis leaned over and asked the "Who Wants to Be a Millionaire" contestant if he or she wanted to use their audience lifeline.  Beads of sweat inevitably formed on the forehead as the contestant knew the audience was a real ace in the hole for the tough question.

And this isn't surprising to most people.  The crowd knows more than we do - duh!

Except when it comes to investing.

In the investment world ,Mr. Market goes off in the form of literally millions of investors and sets the price of financial instruments.  These investors include employees of the company stock, their suppliers, people off to the side innovating to disrupt specific markets, and, yes, even the lightning quick algorithmic traders.

Against these, the individual does some screen, or sees some formation on a chart, or assesses what he or she thinks the Federal Reserve Reserve might do, and DECIDES THAT MR. MARKET IS WRONG AND PRICES SHOULD BE HIGHER OR LOWER.

I've been around the block a few times, and I've seen people who have done remarkably, even spectacularly, well - for a time.  The thing is--most eventually go down in flames.  Why?  Because markets change.  Just as U.S. auto companies went bankrupt because they couldn't see that large fin gas guzzlers were losers once OPEC started to drive up oil prices,  investors who are successful because they hit a winning theme find it very difficult to change with the markets.  In sports, the cliche for teams in the playoffs is "stick with what got you here."  Not that easy in trying to beat Mr. Market.

In the late 70s and early 80s, all one had to do to outwit Mr. Market was load up on energy stocks.  But then, as the market beaters were high-fiving themselves (and reeling in those who wanted to ride their coattails), oil prices plummeted to single digits in the mid-80s!  More recently, people piled into dotcom stocks, proclaimed they were geniuses, and then ran into a 2x4 as Mr. Market decided at some point earnings are important.  Even more recently, overweighting Apple Computer covered a lot of mistakes and made you feel smart - until it didn't.

All of this is brought to mind by this recent piece, How to Beat 99.9% Of Professional Investors, by one of the elite of the investment world - a hedge fund trader.  DIYers should read the 3rd to last paragraph carefully.