How can Individual investor win over S&P 500

Just sharing someone’s post from reddit. No further update from me.

Question: If 99% of traders can’t beat the market, why waste my time learning stock analysis when I can just buy the S&P 500?

I want to invest long term, and if I’m gonna do that, I don’t see any reason not to invest in the S&P 500. But obviously, millions of peoples still choose to invest in apple, disney, coke, etc. So what am I missing here? Is the “most traders won’t beat the market” an exaggeration? I would appreciate some insight.

Answer: I know you are talking about individual investors but I can give you my perspective from the professional’s point of view having both invested in managers trying to identify those that would outperform the market on behalf of clients and being the manager trying to do so for clients.

90% or so of equity investors benchmarked to the s&p 500 fail to outperform the benchmark but that fact changes as you go down market cap levels. Closer to 50% of professionals benchmarked to the Russell 2000 (small caps) are able to outperform. Those numbers change year to year depending on how concentrated the performance of the index is.

Professional managers also use a trick to take advantage of the distribution of random returns by “incubating” multiple strategies. So a manager will will start say 12 strategies with internal money which they are not marketing outside the firm. After about 5 or 7 years maybe 1 to 3 will have outperformed with a solid return profile. The manager will then begin marketing the strategy using the incubated returns which they can do legally because they were real returns that were generated. They can then say yes we have outperformed over x years.

In some ways individual investors have an advantage over pros because you don’t have to rely on client dollars that can get pulled if you don’t perform short term, even if LT performance and strategy is sound. Also we typically have to fill some strategy niche that clients want. If you are a value manager and you like a bunch of “growth” companies, you can’t buy them. Same goes for non dividends and cap size. Some managers have strategies with few restrictions but it is hard to find institutional clients because they want to do the asset allocating and they don’t know what you will be in ahead of time.

The problem individual investors have is the vast majority have no idea what they are doing, which is the best way to explain it. They do no valuation work or terrible valuation work. They get emotional, they buy for dividends disregarding everything else or avoid/sell companies going down on bad news without doing any math, have no risk management strategy, or simply just don’t dedicate enough hours to what they are doing. Plus we have expensive software that most can’t afford which just helps do things faster but not necessarily better. If you are not going to dedicate at least 20+ hrs per week to it and learn some valuation techniques and risk management discipline you should absolutely be in an s&p 500 etf.

1 Like

I mentioned this a few times :slight_smile: Not even knowing the fact, just think and deduce. Thanks for confirming.

Is why most people should just DCA invest in S&P 500 index fund/etf.