With the Odds on Their Side, They Still Couldn’t Beat the Market (2024)

FAQs

What does it mean to beat the market? ›

The phrase "beating the market" is a reference to an investor or corporation seeing better results than an industry standard. With an investment portfolio, a market participant may have managed a return over a specific period of time, such as a year, that surpasses the returns of a market benchmark such as the S&P 500.

It is relatively common to beat the market for 1–3 years at a time. That can largely be explained by luck. But the data clearly shows that even professional fund managers are unable to beat the market consistently over a longer period of time, like 10–15 years.

Second, even if the anomalies recurred like clockwork, once trading costs and taxes are taken into account, profits could dwindle or disappear. Finally, any returns will have to be risk-adjusted to determine whether trading on the anomaly allowed an investor to beat the market.

Market efficiency theory states that if markets function efficiently then it will be difficult or impossible for an investor to outperform the market. Price efficiency is the belief that asset prices reflect the possession of all available information by all market participants.

Risk Is Key

One way to try to beat the market is to take on more risk, but while greater risk can bring greater returns it can also bring greater losses. You might also be able to outperform the market if you have superior information.

We saw from the data above that an investor has about a 75% chance of underperforming the market in any given year which means you have a 25% chance of beating the market in any given year.

Warren Buffett

Those who invested $10,000 in Berkshire Hathaway in 1965 are above the $60.2 million mark today. 1314 Buffett's investing style of discipline, patience, and value has consistently outperformed the market for decades.

Too many variables — From geopolitical events to natural disasters to earnings surprises to management changes to interest rate fluctuations, there are simply too many variables to model accurately, especially when different factors can interact in unpredictable ways.

Predictions are based on market behavior and human psychology, and no one can accurately predict what investors will do and how stocks will react. Thus, while no amount of knowledge can solve this problem, what individuals can do is study past events.

Stock market forecasting is one of the most challenging problems in today's financial markets. According to the efficient market hypothesis, it is almost impossible to predict the stock market with 100% accuracy.

Has Warren Buffett beaten the market? ›

Berkshire Hathaway's CEO, Warren Buffett, widely considered to be the most successful investor alive today, has merely matched the market's return over the past two decades. The fundamental question this raises for investors is how long we should give a manager the benefit of the doubt when failing to beat the market.

Emotional decision making: The volatility of the stock market and increased risk may lead to emotional stress, anxiety, or impulsive decision making when equity markets decline for a prolonged period (ex. 2020 saw -30% in a short time; 2022-2023 was -20%+).

On average, only 46% of funds outperformed the total market over monthly horizons; 39% beat the market over 12-month periods; 34% over decadelong horizons; and a mere 24% for their full history. Fees are part of the problem, of course.