Wednesday, June 20, 2012

Who is beating the market?

"How to beat the market", "Become millionaire with stock market" we
 all have seen those books all around the bookstores and libraries, the truth is if someone is writing a book about a trading strategy, the income that the book will possibly generate is probably more interesting than the trading strategy itself, indeed if we suppose that the strategy is working, it will become worthless as soon as it is published as everyone will start practicing it and thus destroying its effectiveness. As obvious as it can be, People are still buying those books and actually believe in it.

A simulation has been done with 100 000 investors that represent the population of the US with an initial investment of $10 000, no transaction cost were taken into account and the simulation ran for 20 years, here are the results:
  • the lowest portfolio was worth $1,451.16.
  • the best one was $4,638,235.88.
  • On average, the buy and hold investor that just bought stocks and never traded it then had a portfolio of $109,927.40.
  • People who traded actively and did worse than the buy and hold 67,783 (68%).
  • People who traded actively and did better thant the buy and hold investor: 32,217 (32%).
  • Active traders who have more than 1 million at the end of the 20 years: 224 (0.22%).
Active traders did poorly compared to buy and hold investors and remember that trading fees were not even taken into account!
It shows that the buy and hold portfolios are doing better on average than active traders, and that becoming a millionaire is very unlikely to happen.

Wall street journal  has measured the performance of professional investors compared to the Dow Jones amd 51% of the investors were not able to beat the DJIA on the long run, showing that instead of using the service of the Wall street pros you could have done the buy and hold method and performed better than 51% of wall street big guys.

Random Market Outcomes
Here is the graph of the investors from the simulation game and possibly the reality too, and you can see that there are very few people making it to the million and those are
not going to reveal you their winning strategies.

CONCLUSION:-BUY AND HOLD STOCKS if you are not a finance specialist-STOP buying books about beating the market,or Write one and buy and hold stocks with the profits from this book :)


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