Bogleheads Forum

Reader Question

You wouldn't by any chance be the same person as a poster named "markettimer" on the bogleheads forum? Just curious.

My reply

No, that is not me. I have posted on Bogleheads forum in the past but I am not one of its more prominent members.

Since we are on the topic, I'd like to re-iterate that bogleheads.org is far and away the single best internet resource for an individual investor. It is the best investment resource not because it provides any brilliant insight into beating the market, but because it is intelligent and intellectually honest enough to tell the unpleasant truth that beating the market is a myth born of and perpetuated by Wall Street. I'm talking Wall Street in its broadest form, not just the Lower Manhattan site. I'm talking everyone and everything in financial, wealth, and asset management business -- from your local financial advisor to Greenwich, CT hedge funds.

The myth of beating the market is almost solely responsible for Wall Street's existence and provides most of its annual revenues. Needless to say that this broader Wall Street is a massive multi-trillion dollar entity with huge financial, intellectual, and cultural influence which has extreme interest in preserving and growing this myth. That explains why this myth has such a stranglehold on vast majority of investors, even though it takes all of fourth-grader logic to realize that it cannot possibly be true:
a) Passive index buy-and-hold investors will obtain identical results BEFORE EXPENSES as all the Wall Street wizards combined. This is because all of Wall Street wizards combined collectively determine market returns and index-buy-and-holders simply passively track those returns.
b) Wall Street wizards do not work for free, nor does Uncle Sam let you realize capital gains without paying taxes on them (tax-sheltered accounts excepted) which means that their net returns AFTER EXPENSES will trail the market -- and that difference in expenses, while relatively small in any one year, compounds into huge amounts over investing lifetime.

To top it off there is only the most miniscule evidence that some of the said Wall Street wizards are better than others. There's Warren Buffett, there's Sequoia Fund (both of those incidentally are disciples of Benjamin Graham), and you could argue that Renaissance Technologies also belongs in that group, though their track record is probably not long enough to justify the inclusion. That's about it. Of the tens if not hundreds of thousands of other hedge funds and mutual funds and other investors none have had both the track record and the longevity to even suggest that they can beat the market. Huge numbers of them do so in any given year because even after expenses the odds of doing so in any one year are only marginally lower than 50/50 and tens of thousands of them play the game. But saying that they can beat that market based on a few years of returns is like concluding that somebody is psychic after correctly calling, say, 7 out of 10 coin flips.

So what we have is a priori zero-sum game (relative to the market) which you can either play for free yourself (or, to be exact, very nearly free using low-cost index funds) or pay substantial amounts to various loudmouths to play it for you. There're tens of thousands of these loudmouths to choose from, all claiming to be the best at the game. But there's barely a shred of evidence that any of their claims have been true in the past and zero evidence that they will be true in the future. What do you do? It should not take long for you to conclude that playing the game yourself for free is the way to go.

Again, fourth-grader logic is all it takes to appreciate that beating the market is a nice dream for vast, vast majority of investors, both amateur and professional. Nevertheless, there are about a million forums, sites, and blogs devoted to all sorts of trading and market-timing discussions. Every single one of them is worthless, without an exception. How do I know that? Because nobody in their right minds would discover a way to make money in the market and then proceed to tell the world about it for free -- or even for a low, low price of $99 for an annual newsletter subscription. Every single one of those million sites devoted to discussing the everyday going-ons in the financial markets exists for one or more of the following three reasons:

1. To sell a product or service provided by the site owner. These include mutual funds, hedge funds, brokerage services, financial management services, asset and wealth management services, investment books and newsletters, and various trading "programs".
2. To attract page views and the ad clicks that come with those page views. The more people come to the site, the more ads they will click, the more revenue the site owner will get from Google or affiliate networks that run the ads.
3. To (further?) inflate the egos of the posters and readers. Discussing the markets is one of the easiest ways to look and feel intelligent that I know of. At micro level you have tens of thousands of tradable securities, each with potentially millions of data points all begging to be tortured into confessing some brilliant conclusion. At macro level you have central banks, sovereign funds, hedge funds, the "1%", the illuminati, and the like all potentially manipulating markets for their own nefarious purposes. Whether you are a numbers guy or a big-picture guy, it's pretty much impossible not to sound smart when talking about this stuff. And who doesn't enjoy sounding smart, especially with stats and graphs backing him up?

None of the three reasons above actually have anything to do beating the market, and that's the point. People -- and there are exceedingly few of them -- who actually have a clue as to how to beat the market are too busy doing so. And even if they are not busy, they are certainly not stupid enough to share that precious knowledge with everyone else, instantly making it worthless. I have been fortunate enough to be one of those people for a number of years. I certainly did not go on a random internet forum and post "Look everybody! After correctly accounting for RST and UVW, XYZ is trading for way below its net current assets!" To uncover those few true market-beating opportunities you have to have a certain level of intelligence (and a healthy dose of luck to be looking in the right area to begin with). That same level of intelligence ought to prevent you from making stupid moves like telling the money-making secret you just uncovered to the world.

Can you imagine a scientist dedicating years to cracking one run of the lotto machine and eventually somehow divining tomorrow's winning lotto numbers then going out and sharing that knowledge with anybody who would listen? That would instantly turn his winnings into only a small fraction of what they could have been. It's beyond ridiculous to think this might happen. Yet for every market "expert" there're thousands, if not millions, loyal followers truly believing that their hero knows the secret to beating the market and is sharing it with them -- often to the point of paying substantial sums of money for this secret.

Which brings me back to Bogleheads -- they have fully grasped the simple truth I outlined above (and in every other post I make here) and came to the only logical conclusion that trying to beat the market is akin to trying to make money in a casino, where the odds are always stacked against you. They have realized that passive, low-cost index investing gives you the best odds of "winning" in any one year -- and virtually guarantees it over the long term. This simple and not particularly pleasant truth -- along with their strength in numbers and eloquence of many of their members -- is why they are far and away best internet resource when it comes to investing.