do you believe you can beat index funds?

You asked about your performance relative to an index.


If you are assuming the index is perfectly random, isn't that the same as asking about your expected performance in absolute terms, meaning relative to zero?


Why even include the index in the equation, why not substitute 0?


Some people simply adjust the risk-free rate by expected volatility to get expected return - although I've never seen one of them in the Forbes 400.


So what am I missing?


lurch

the reason to measure against an index is to see how much one is gaining or losing by picking 10/20 stocks out of 500.

But ther're more than 500 stocks in the world. And not all "investments" are listed on exchanges.


So how and why do you pick which 500 stocks you want to do better than?


leroy

I've had some excellent runs buying individual stocks but I have changed my mind based on a lot of reading and prefer using QQQ and SPY. If I want to acheive superior returns (beat the averages) I'll try and time the market and/or use leverage.

The S&P 500 is a cap weighted average and thus amounts to disproportionate weighting in market capitalization and not stock price. Therefore the overall valuation of US companies is reflected in this average. This probably would not hold true if you selected 500 stocks at random.

I simply meant you are indifferent to what your investment is correlated to, so long as it has a positive expectation, and especially if you have no opinion on the instrument to which it is correlated.


I assumed "beating" was not limited to positive correlation over a specific period, but could include perfect inverse correlation with a positive random deviation.


The question implied a super-choice - already made - to invest in either an index or some subset of compenents, and the sub-decision was whether to invest in the index or the subset of componenets.


The question could perhaps have been simplified to saying we have stock X and stock Y, with similar deviation from expectation, do you think you can tell me which has a higher expectation?


Or something...


El-Roi

sure i think you can dig and find some stocks that will beat the averages. not many though but they are out there. you need to know something about the stock and its business and do some legwork.

usually local stocks can be followed and you can get a good read on whats going on with the company before the general public. i remember in the 60's when i told my parents to buy into that mcdonalds company as their 19 cent hamberger was good. they laughed. then i went to colledge and ate at paleys fried chicken in florida. it had a picture of a white haired guy on the sign. and something about kentucky fried. it had to make a go of it. i was too young to know about investing in those days.

now i find companies that have owners(managers) with a substantial interest in the company and something looks like its changing with their business. then i short or go long depending on the direction.

You manage against a benchmark (depending solely on your time horizon) because efficient markets don't allow one benchmark to significantly outperform others for long periods of time. Thus, your goal in managing vs. a benchmark is to do better than an efficient market. If you can't do it..then buy the index.


It's as simple as that. 90+% of money managers and active mutual funds don't beat market returns in the long run. It's hard to do. And they have a lot more resources than you do.