The Myth of Easy Money: Why Most Traders Struggle

Introduction

Welcome to the world of stock market investing! In this article, we’ll explore the challenges faced by both professional traders and retail investors. Buckle up as we delve into the intricacies of consistent profitability, emotional biases, and the powerful law of large numbers.

1. Market Efficiency and Randomness

The stock market operates efficiently, swiftly incorporating all available information into stock prices. This efficiency poses challenges for traders aiming to consistently outperform the market. Even seasoned traders find it difficult to beat market returns consistently.

2. Data and Statistics

SPIVA Report Figures

The SPIVA (S&P Indices Versus Active) report provides valuable insights into fund performance:

• U.S. Equity Funds: Over the long term, most actively managed U.S. equity funds underperform their benchmark indices. For example, the average underperformance rate was around 64% annually over the 23-year history of SPIVA Scorecards .
• European Equity Funds: In H1 2023, 72% of British pound sterling-denominated and 76% of euro-denominated actively managed Europe Equity funds underperformed the S&P Europe 350 .
• Retail AIFs: These funds have varied performance, but the average retail investor has struggled to outperform the market .

3. Emotional Biases and Poor Decisions

Emotional biases play a significant role in investment decisions. Consider these common biases:

• Confirmation Bias: We tend to seek information that supports our existing beliefs, ignoring contrary evidence.
• Gambler’s Fallacy: Assuming that past events (like consecutive market gains) predict future outcomes.

Successful investing requires self-awareness and overcoming these biases.

4. The Law of Large Numbers

Grasping the law of large numbers reveals the inner workings of the stock market over time. As the number of stock tickers increases, your portfolio’s performance is more likely to align with the market’s average return. Short-term volatility evens out, favoring long-term growth .

Conclusion

This article serves as an introduction to deeper explorations. In future posts, we’ll dissect underperformance, dive into emotional biases, and apply the law of large numbers to stock markets. Stay tuned for more insights!

Remember, investing wisely demands patience, knowledge, and a realistic understanding of the market. 

References

S&P Dow Jones Indices. (2023). SPIVA Europe Scorecard. Retrieved from here.

S&P Dow Jones Indices. (2023). SPIVA U.S. Scorecard. Retrieved from here.

European Securities and Markets Authority (ESMA). (2023). Costs and Performance of Retail Investment Products. Retrieved from here.

Bachelier, L. (1900). Théorie de la spéculation. Annales Scientifiques de l’École Normale Supérieure, 17, 21-86.