do you believe you can beat index funds?

do you believe you can beat index funds?


whatever type of stocks you trade, do you believe that as a customer you can beat the index funds of that category in the long term?


for example, if you typically have a portfolio of 20 stocks, all big nasdaq stocks...do you really think this portfolio, after your trading transactions, value of time (explained below), expenses, etc., over 5/10 years, will beat the Nasdaq 100 Index, which you can simply buy by purchasing QQQ and sitting on it for the same length of time?


I am not here to criticize anyone, just asking some of the posters here (Zee, Haley, Kim Lee, elroy, paul, etc.) if you believe you are winning by trading as a customer.


Value of time (my definition) : if you can make more money doing something else with the time you spend watching, analysing stocks, then this is an economic negative....however, one must factor in the fun factor of trading, watching, sweating, analysing stocks ... this is a positive for a lot of people....so factor this in...i know some who are perfectly happy knowing they are losing 1% against the market averages when they trade actively, because it is fun for them, and that's perfectly fine, becuase the fun part of it is worth the 1% differential in the long run.

You can make money trading, but it takes an ENORMOUS amount of labor. So it helps to scale it with a lot of capital and equipment.


But trading, for the most part, involves using the news and the ticker to predict what levels of buyers and sellers will show up nearby. A longer form of trading focuses on larger trends in the supply of and demand for investments of specific durations, without that much regard to their relative utility compared to competing investments of alternative durations, meaning without regard to the value of stocks.


So if we reduce your question to can someone, in the long run, do enough better than his competitors at predicting the actual business prospects of companies to make money, screening out all those other factors, I would say "Yes." I know I can do it in at least a limited subset of companies with businesses that I understand better than anybody else.


Problem is, 99% of businesses nobody really understands, so they can trade at crazy prices seemingly forever. Take Enron - nobody could have had any idea what was going on, and I wasn't even paying attention. If somebody knew, he apparently didn't have too much credibility or a following, and probably sold a 100-lot. But then again, somebody had to be selling on the way down.


Analyst earnings estimates are only accurate so long as earnings exhibit strong serial correlation, a slight trend, and a lot of positive steering from management. Every time earnings collapse, analysts are behind the curve by precisely the magnitude of the sequential collapse.


But if you are like a freak biophysicist, for example, you may be able to predict the prospects for pipeline drugs better than enybody else. Or if you run a children's day-care center in Harlem, you may command a good statistical sample for determining the prospects of certain video game manufacturers or clothing trends. Or if you run a cash register at a monster grocery store in the Midwest...


olra

The biggest mistake I made was assuming that somebody else had his hands on the wheel.


By the time I even got around to visiting VerticalNet's web site, the stock had already gone from like 150 to 12. But I'm thinking how is this stock not worth zero? What does somebody know that I don't? I was shocked, the emperor had NO clothes.


Same thing with, like JWEB and Net-Zero. Steve Jurveston thought they were great business ideas. But I used these services, and it was pretty plain to me as a customer that they were getting broker by the day at an alarming rate, and scaling back their ambitions even at the same time as putting on a good face for the public.


You can feel it, as a customer, when each additional customer is costing a business money, when they're forced to add customers to keep Wall St. happy, but at the same time they're trying to minimize their per-customer loss so they can eat. It's like Knight Trading was already saying how they were considering charging to execute Nasdaq orders - saying out loud they couldn't afford your business, wanted less of it - and yet people were still paying over 20 for NITE.


I also used to do temp work in Silicon Valley in the early 90's. I debugged microncontrollers at C-Cube, so I knew how many orders and interest they were getting for chip-sets for the Asian DVD market. The analysts heard about it a few weeks later, and the stock went from, like, 20 to 40.


I separated bad die from the RayChem substrate in the Intel prototype-tooling lab, so I got the runs straight from the new Texas plant, and "knew" the yields from their latest sub-micron process probably better than any single of the other 5 billion people on Earth.


I built cardboard boxes at the 3COM shipping plant right before the hey-day and washout (remember Ascend and Cascade?) and it seemed pretty clear capacity was lagging demand in both directions. I worked at Sun, Raychem, interviewed for logistics for AMD's new plant, I coordinated the major hub for the purchase and sale of used/refurbished Hewlett test equipment in the Valley, I sold the new Dot-Coms all the free juice and snacks for their break rooms which gave me a perfect index of the rise and fall of throwaway money - as well as of the day-to-day orders of Kozmo, WebVan, etc. - oh, I remember a good one, this loser VP from Oracle, Umang Gupta (GPTA?), started his own database company, and there was no doubt in my mind the place was doomed from the first day I worked there.


So the point is not that I had the sense to make a billion dollars while temping for $16.00/hr. The point is that people are dumb, and the truth can stare them right in the face and yet nobody sees it.


leroy

"So if we reduce your question to can someone, in the long run, do enough better than his competitors at predicting the actual business prospects of companies to make money, screening out all those other factors, I would say "Yes." I know I can do it in at least a limited subset of companies with businesses that I understand better than anybody else. "


let's also add : but beat it enough to overcome the vig at the same time

You know, I don't like your original assumption that, as part of the free money we can get in this world for the good fortune of having been born, if you buy and hold an index you will make money.


As I said in another post, if you had bought at the 1930 low and held through today, you would hve made money. But the reason why the 1930 low was so low was specifically because nobody had the money to buy. At least not on this planet. maybe if you were from Mars, you could have had money on Earth when no one else did.


This goes along with what people call "international diversification." The theory is that if you spread your investments across two countries, the returns won't be correlated, so you can filter out country-specific risk and make free money. But the reality is THE ONLY REASON THEY AREN'T CORRELATED IS BECAUSE OF THE COSTS AND FRICTIONS ASSOCIATED WITH INVESTING IN FOREIGN COUNTRIES. If there is no geographic friction stopping the free flow of money and infromation between countries, their stock markets become PERFECTLY correlated. (Which of course brings up asymmetric friction, which is what I was talking about with stocks, where a Wall-St. analyst can't afford to build carboard boxes all day at 3Com but you can.)


In theory, the stock market should always rise to the level where people expect NO return over their investment time horizon. Why? Because people have no opportunity cost! If they have extra money now, and need mony for retirement, there is NONE of the opportunity cost which economists normally associate with "investment."


Somebody might have enough money now that he would rather have 1 apple in 10 years than 2 additional apples today. Meaning, the required return to get him to invest is NEGATIVE 50%. The more excess wages people have, the further into the future they are willing to accept a negative return, so the further against future expectations they discount the immediate stock price. If you have the money at the same time as everyone else, you will have to accept a negative rate of return at the same time as everyone else - while dot-com slackers fresh out of college drink free apple juice in the break room!


Anyway...


The "vig" is different for everyone, and it really isn't very big, compared to other factors.


loudmouth

as for messing with the big stocks its pretty clear you should buy a bunch and hold or do the index funds. both methods should return close rewards over a long time.

with small stocks you can certainly beat the market if you can identify things missed or not known by others. rmember that smaller stocks may not be covered by analyists and so little is really known to the general public. and as ive seen over the years most insiders dont know much themselves. except when there is alot of big insider selling on some stocks you can confidently bail out and then short them.

"You know, I don't like your original assumption that, as part of the free money we can get in this world for the good fortune of having been born, if you buy and hold an index you will make money. "


I don't think I ever stated that I had this assumption. I'm asking if individual investing can beat index funds. Whether index funds are up or down, this question still applies. If the NDX is down 10% over 5 years time, can an individual investor, however much the investor trades, beat that mark given he is paying more vig than the index fund?

I gather by your statements that you do believe you can beat an index like the Russell 1000 index (small cap stock index) or possibly you mean even smaller stocks than that - I think there is another index that does measuer that, but I'm not sure.


Does the edge of these snipbits of info beat the higher vig you pay on smaller stocks? I don't know, what do you think?


Also, I am slighly wary of this info not known to the general public but still public info. I've known several very smart doctors lose money on small medical stocks because they thought they had knowledge not applied in the market. I believe it is true that if one is bright and smart, and knows how to apply information to the marketplace, one may be able to beat the market indices in small stocks...but what I am saying is that even if you are a brain surgeon, it doesn't necessarily translate to applying your brain with the info to beat the market even with some insider information (again, we're talking public info that the general public may not know or use). But of course, a brain surgeon and an accomplished professional gambler are two very different brains...I would put my money on the professional gambler understanding how to apply the info he may have over the brain surgeon.

yes, you can also beat a loser by doing nothing, but can you predict that the market will be a loser in the next 5 years?


if you can't, then you shouldn't be doing nothing.