Why it's so hard to beat the market (Wisdom of Crowds)

Though there are more people losing money than the people making profits, beating the market has never been easy. No matter what we do, losing is a part of the game and that’s what the reality is.
 
Steve Ladd said:
It is common knowledge that most hedge funds, mutual funds, and advisors under-perform the general market. Even Warren Buffet has fallen behind! It seems that the vast majority of market participants do worse than average. I’ve always wondered, how can this be so? Why is it so hard to beat the market given that just as many people must do better than an average as do worse than the average? Well I think I have found an explanation. Part of it comes from the concept of the Wisdom of Crowds and part comes from clearer statistical thinking.

A favorite example of the Wisdom of Crowds is a guessing contest at a county fair where everybody guesses the weight of an ox. Each person writes their estimate on a piece of paper. When the guesses are averaged it is found that said average is closer to the ox's true weight than the estimates of most individuals, even the experts. Note that the crowd is not a mob. Rather, they are a diverse collection of independent individuals making a certain type of prediction.

Now an analogy. For the guessing contest substitute the market. For the guessers substitute the market participants. For the average of all guesses substitute the portfolio of the S&P 500 or whatever benchmark you follow. The analogy tells us that no individual is likely to beat the market because their wisdom is inferior to the collective wisdom.

But our analogy remains incomplete. If the average of all guesses represents the holdings of the S&P 500, what does the true weight of the ox represent? Note that the Wisdom of Crowds theory doesn’t require that the average of the guesses be exactly right. The average guess is surprisingly good but there will be some discrepancy between it and the true weight.

Perhaps the true weight of the ox should represent that system which, of all possible systems, would give the highest return. After all, we aren’t just trying to match a benchmark, we’re trying to get as rich as possible. In other words for the true weight of the ox substitute the Holy Grail, the best imaginable trading system.

This requires us to rethink the significance of the benchmark. Perhaps it’s incorrect to think of it as the average of all the returns experienced in that market in that time frame. The S&P 500 isn’t the average return of everyone who dabbled in that market. It’s simply what those exact stocks actually achieved.

If this is so, consider the ramification. The gap between the average ox-weight guess and the actual ox weight becomes analogous to the gap between what the benchmark achieves and what the Holy Grail would achieve. Here the analogy presents a problem. The ox weight is an actual number, and the average guess comes pretty close to it. But the Holy Grail is hypothetical, and would seemingly be far superior to holding the S&P 500.

Or must it? Maybe all those Holy Grails are more constrained than we think. Maybe the Holy Grail’s realistic return, over time, isn’t so much higher than that of the benchmark. If this is so, the little gap between the average ox-weight guess and the actual ox weight represents the difference between the benchmark and a portfolio or strategy that does only a little better on a consistent basis. Now it’s not so hard to imagine a sufficient number of benchmark-beaters.

To summarize, my thesis is that it’s hard to beat the market because 1) the market benefits from the Wisdom of Crowds whereas we, as individuals, do not, and 2) the realistic return of the best possible system or portfolio isn’t as great as we imagine due to real-world constraints. Just as very few guessers will guess more accurately than the average guess, very few market participants will get returns superior to that of the benchmark. And the average of all participant returns won’t equal that of the benchmark. Rather, it will be well below.
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it is difficult ...yes

but not impossible.

if you believe it is impossible........then try something else.

it is well documented here that i lost money for a decade.

and that it took me that long to understand Al Brooks.

markets are logical.

just as water finds it's own level-the level that they are allowed to reach by the topography of the land-so the markets do the same.

they follow the path of least resistance........this cannot be predicted consistently days or weeks or hours or even minutes...... ahead.

but prices are printed and can be seen in the present ,, in hindsight.

trading is done in hindsight...the past is prologue.

markets do shout to those who know it's language.

It is price that determines price.....price is determined by buyers and sellers.

it does not hide it's intentions......to those who learn the language.

price data is no secret
 
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Kagisopeter said:
Though there are more people losing money than the people making profits, beating the market has never been easy. No matter what we do, losing is a part of the game and that’s what the reality is.
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that is the reality even in the real world in any competitive activity
when i started golf in 1987 the first prize was usd in my country's tour.
the competition was intense even for that money.
 
Steve Ladd said:
Even Warren Buffet has fallen
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HAVE A HEART

that has happened after 50 years of a stellar record.

with information flow moving faster than then speed of light....and available to anyone with a smart phone..........markets have become efficient as never before.

and markets in Main street are becoming cut throat .......with the result that it is difficult to pick winners
 
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