Weekend reading: Beating the market is really, really, hard

Good reads from around the Web.

Anyone who claims it’s easy to beat the market over multi-year periods is well worth ignoring when it comes to investing.

Especially if they have something to sell you.

For my sins I’m a wannabe Warren Buffett. I invest actively and monitor my returns carefully. I have read as much as anyone about every investing method under the sun. I totally get the appeal.

But when it comes to policing comments on Monevator, I spend most of time replying to those who claim some active strategy – market timing, ditching asset allocation, CAPE valuation, any of a dozen other regulars – is the route to easy riches.

None of it is.

Honest active investors who’ve achieved any success know just how hard – or lucky – what they’ve done has been. Warren Buffett, for instance, for all his billions is relatively modest about his abilities. And he urges everyday folk to use index funds.

Which brings me to my post of the week, from a money manager, Rob Seabright. He’s been in the investment business for 30 years but has stayed intellectually honest, judging by this article explaining just how hard successful active investing really is.

Rob writes:

To put things into perspective […] if you had picked the best stock to buy every day and put all of your money in it at the beginning of the day before selling it at the end of the day, you could have turned $1,000 into $264 billion by mid-December alone.

Therefore, if you didn’t achieve a 100 percent return for 2013 you didn’t get even 4/10-millionths of what was available for the taking. In other words, nobody is getting remotely close to what the market offers.

None of us is all that good.

Here’s some of the evidence he cites (trimmed for space):

• In 2006, the TradingMarkets/Playboy 2006 Stock Picking Contest – involving Playmates and professionals alike – was won by Playboy’s Miss May of 1998 and a higher percentage of participating Playmates bested the S&P 500′s 2006 returns than active money managers.

• As Charley Ellis has pointed out, “research on the performance of institutional portfolios shows that after risk adjustment, 24% of funds fall significantly short of their chosen market benchmark and have negative alpha, 75% of funds roughly match the market and have zero alpha, and well under 1% achieve superior results after costs — a number not statistically significantly different from zero.”

• Morgan Housel recently discovered that the companies with the most Wall Street sell ratings in January of 2013 outperformed the market for the year.

• The S&P Dow Jones Indices most recent year-end report confirms once again that actively managed funds — where managers try to beat the market by making good investment choices — tend to underperform their benchmarks.

• The latest Dalbar QAIB data shows that over the past 20 years, the average equity investor has suffered an aggregate underperformance of nearly 50 percent while the average fixed income investor has suffered an aggregate underperformance of nearly 85 percent.

• The hedge fund industry as a whole lost more money in 2008 than it had made in all of the previous 10 years. Even worse [says author Simon Lack], “if all the money that’s ever been invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good.”

By all means try to beat the market if you want to. (I do, and – for now – I do.)

But leave the naive, the know-nothings – and the salespeople – to tell others that it’s easy.

From the blogs

Making good use of the things that we find…

Passive investing

• Two behaviors that hurt stock market investors – Rick Ferri

Active investing

• A dumb rule: “You’ll never go rich taking a profit” – The Psy-Fi blog
• Why focus on income? – DIY Income Investor
• Digging into Twitter’s first earnings report – Musings on Markets
• Goodhart’s Law Vs. French and Fama – Rob Davis/Maven
• The single best metric: EV/EBITDA – Crossing Wall Street

Other articles

• This is your brain on stocks [Year-old but good. PDF] – The Big Picture
• Bonus day at the bank – Under The Money Tree
• The stock market: Shrewd bet or stupid gamble? – Investing Caffeine

Product of the week: Buy-to-let lender Mortgage Works is offering a two-year fix at just 2.49%. ThisIsMoney calculates payments on a typical interest-only loan of £150,000 would be just £371 a month. Beware the fees.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

• The three kinds of investors who should sell now – New York Times
• Vanguard is targeting advisers with ETF model portfolios [Search result] – FT

Active investing

• Ideology is killing your returns – Bloomberg
• Are emerging markets cheap? – MorningStar
• The new CS Global Investing Yearbook 2014 is out [PDF] – Credit Suisse
• Top anecdotal signs of a market bubble – CFA Institute

Other stuff worth reading

• Investing’s great irony: Everyone thinks they’re contrarian – Motley Fool
• Rent in London, buy in Aberdeen [Um…] – This is Money
• “I make £1,000 from Mumsnet”, and other side hustles – Telegraph
• Bank of England says it will keep rates low for longer – This is Money
• c. £38,000 income is the line with taxes paid Vs. benefits taken – Telegraph
• Is peer-to-peer lending too good to be true? – The Guardian
• Scottish Independence: Assessment of Sterling currency union – UK Gov

Book of the week: Amazon has knocked £10 off the usual price of its entry-level Kindle. I have the same model and I think it’s the best way to own and read text-based books nowadays, without cluttering up your house – or your suitcase. You can buy it for just £59.

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1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” [↩]