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Can You Beat The Market?

“Beat the market? The idea is ludicrous. Very few investors manage to beat the market. But in an astonishing triumph of hope over experience, millions of investors keep trying.” – Jonathan Clements, author

Decades of research proves trying to identify in advance which stocks will outperform is a fool’s game. If you had to guess the top three best-performing stocks since the market bottomed in March of 2009, which stocks would you guess?

I recently posed this question to friends, family, and colleagues- their collective answers were highly predictable. Household names like Amazon, Google, Microsoft, Boeing, and Apple topped nearly everyone’s list. In addition, most of the people I surveyed owned these stocks individually in their portfolios because they thought they would make superior investments.

However, the top three best-performing stocks are companies you’ve likely never heard of, let alone would have hand-selected for your portfolio. They are Patrick Industries, Jazz Pharmaceuticals, and MGP Ingredients.

Picking the right stocks is a futile exercise for almost everyone. How futile?

When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing 4% of listed companies. Said differently, 96% of all stocks over the past 90+ years have added nothing to the stock market’s total returns! In addition, more than half of all stocks delivered negative real lifetime returns.1

The SPIVA scorecards provide additional insight. Since 2002, S&P Dow Jones Indices has published biannual reports called the SPIVA scorecards, showing the percentage of professional money managers that outperform the market through stock picking, market timing, and other “active” investing strategies.

Sadly, as of June 30, 2018, 98% of US Small Cap managers and 92% of US Large Cap managers underperformed their respective benchmarks over the previous 15-year time period.2 Would you ever accept a bet with odds of 2/100, or even 8/100?

So, why can’t even the best and brightest money managers beat the market?

Markets are an efficient, zero-sum game. There are winners and losers, but the net of all trading must be zero. This is prior to accounting for the impact of biases and cognitive errors on decision-making like we've discussed in previous posts. In addition, participation in the market isn’t free - when you account for fees and trading costs, plus the occasional lousy decision, the advantage a handful of people seem to have fades to zero.

Given this information, beating the market’s rate of return becomes a nearly impossible task.

It’s not just about finding a good company and hoping it holds a competitive advantage in the future. Stock performance isn’t about how well a company performs; it’s about how well (or poorly) the company performs relative to investors’ expectations.

Successful investing is often an exercise in mass psychology– beating the market isn’t about speculating better than the crowd, it’s about speculating how the crowd will behave. The price of a stock at any given time reflects the consensus estimate of millions and millions of market participants. If you are daring enough to think millions of people are wrong, you ought to have a very legitimate reason for thinking so.

Every time you buy or sell a stock, there’s someone else on the other end of that trade making the opposite bet. On average, there are 82.7 million global stock trades made every day. On average, this results in $346.4 billion changing hands on a daily basis.3 Of the trades made every day, roughly 95% of the volume is made up of institutional market participants buying and selling stocks.

As such, it’s likely not your neighbor, Roger, on the other end of your trade. Market participants like the Sequoia Fund (one of the most successful mutual funds in history) are likely on the other end. The Sequoia Fund sometimes spends up to a decade analyzing a company, going to annual meetings, and talking to dozens of employees and customer suppliers before ever purchasing the stock.

Other market participants include professionals with unlimited computing power who spend all day, every day analyzing market movements, company fundamentals, political environments, etc. Asset management firms employ some of the brightest minds in the world, stocking their offices with Ivy League-educated professionals and PhDs alike.

Knowing who you’re up against is critically important.

Instead of trying to be one of the very select few who beat the market, here are three things you can do to increase your odds of investment success:

1. Define your area of competence and stay within that area.

Don’t try to be a professional investor if you aren’t one. Wandering outside of your comfort zone or area of expertise can be a very expensive journey. Attorneys don’t perform orthopedic surgery and accountants don’t draw up blueprints for high-rise buildings.

2. Broadly diversify by owning low-cost, passive mutual funds or ETFs.

Passive investing refers to an investment strategy focused on achieving long-term appreciation of portfolio values with limited day-to-day management of the portfolio itself. Maintaining broad market diversification has never been more inexpensive for investors.

3. Limit your exposure to individual stocks.

Some investors enjoy “playing” in the market, even if they know it may cost them. If you feel the urge to picks stocks, limit your “fun money” to 5% of your total investable assets.

It’s not impossible to beat the market, but the data above shows it’s incredibly unlikely. Attempting to beat the market is especially unnecessary since passive investing exists as an easy and readily available alternative that research has shown consistently produces better results.

No one has been able to reliably and persistently beat the market, and your future self will thank you if you don’t try.



1. Bessembinder, Hendrik (Hank), Do Stocks Outperform Treasury Bills? (May 28, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: or

2. S&P Dow Jones Indices LLC. SPIVA US Mid-Year 2018 Scorecard.

3. World Federation of Exchanges members, affiliates, correspondents and non-members. Trade data from the global electronic order book. Daily averages were computed using year-to-date totals as of 12/31/16, divided by 250 as an approximate number of annual trading days.


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