# Is it becoming more possible for the little guy beat the market?



## Spidey (May 11, 2009)

File this into another one of my "Thinking Out Loud" series. 

Hearing the conventional wisdom about the futility of beating the markets, the disadvantage of competing against the institutional investors, there are very few "Warren Buffetts in this world, etc. has convinced me to place a large portion of my holdings into index funds. Admittedly I'm going on fairly short-term results, but my stock-picking portfolio has been significantly outperforming the index one. I'm starting to wonder if this information regarding the benefits of indexing may be partly based on outmoded logic derived from the past few decades or even centuries. Several things have changed in the past few years to level the playing field for the small investor:

- It used to be that only the "big guys" had up to the minute information. Sure they still have some advantage in this regard but the internet supplies us with pretty timely information. I can now often find about inside sales, latest news, etc. within hours. 

- Similarly, it used to be difficult to receive good information regarding key ratios, company reports, etc. Small investors used to have to subscribe to costly information books with information that may be outdated by the time it's received. Now I can get the latest up-to-date information from several stock sites.

- It used to be almost impossible for the average investor to know what the "big guys" were doing. Now we can get a consensus of information from several experts on shows such as BNN's Market Call and online analyst consensus (which I only put a small amount of weight to). 

- And despite some lingering disadvantages, I see one major advantage that the small investor has over the "big guys". Namely they can put a low or "stink" bid in on a couple of hundred shares of bottoming stock and make a nice profit without the market even noticing. It's almost impossible for the big guys to do this, with their several thousand shares, without tipping off the market before the purchase is completed. A similar scenario occurs when selling. 

- Similarly we are told that it is very difficult to beat the index because "we are the index". But are small, disciplined DIY investors a significant portion of the index? Wouldn't they be a fraction compared the the mutual funds, institutional investors and the people who pick stocks based on the latest "hot tip"? 

I still agree that the majority of small investors will not likely beat the markets. But it seems that no sooner does an investing style come into vogue, such as index investing, that the next "hot" style is missed. In fact, I'm wondering if all this indexing may at times be creating distortions in specific stock prices and therefore creating opportunities. For example, are some blue chips being unfairly driven down to bargain levels when index investors are bailing? I'm not dismissing the challenge involved in outperforming the market, I'm just starting to question what seems to be the general advice to not bother trying.


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## doctrine (Sep 30, 2011)

The 'index' is just more active stockpicking. Why people think Standard and Poor's should define what they should measure their returns against? What do they know that everyone else doesn't? A good stick perhaps, but no reason why I should choose S&P over anyone else? A total market return might be useful.

My stockpicking is outperforming the S&P active index as well. People game the indexes and reduce the returns; most of the stocks added in the last few years are pumped up 40-50% in the months leading up to the addition, so by the time the index investor gets there, they've gone from a 10 P/E to a 15 P/E and reduced their returns going forward. 

OTOH, I like investing in companies below S&P's threshold, so there's less manipulation and better P/Es. Then again, maybe people who own RIM know something I don't.


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## MrMatt (Dec 21, 2011)

I'll have to disagree with a few points. Sorry for making such a mess of the quoting.

- It used to be that only the "big guys" had up to the minute information. Sure they still have some advantage in this regard but the internet supplies us with pretty timely information. I can now often find about inside sales, latest news, etc. within hours. 
Gotta give you that one.

- Similarly, it used to be difficult to receive good information regarding key ratios, company reports, etc. Small investors used to have to subscribe to costly information books with information that may be outdated by the time it's received. Now I can get the latest up-to-date information from several stock sites.
When were company reports ever pre-released to select individuals?
AFAIK company financials are released to EVERYONE at the same time. Now I personally wait a few days to get my report in the mail and read it if I feel like it, rather than getting my copy immediately, or waiting for some analyst to write a report. But I could get it just as fast as anyone else.

- It used to be almost impossible for the average investor to know what the "big guys" were doing. Now we can get a consensus of information from several experts on shows such as BNN's Market Call and online analyst consensus (which I only put a small amount of weight to). 
You still don't know what the big guys are doing if you base your logic on analyst reports. The analysts aren't the big guys, they're just people writing reports.

- And despite some lingering disadvantages, I see one major advantage that the small investor has over the "big guys". Namely they can put a low or "stink" bid in on a couple of hundred shares of bottoming stock and make a nice profit without the market even noticing. It's almost impossible for the big guys to do this, with their several thousand shares, without tipping off the market before the purchase is completed. A similar scenario occurs when selling. 
If you work in smaller cash increments, your impact will be less noticed, Warren Buffet admits that it is one advantage small guys have.

- Similarly we are told that it is very difficult to beat the index because "we are the index". But are small, disciplined DIY investors a significant portion of the index? Wouldn't they be a fraction compared the the mutual funds, institutional investors and the people who pick stocks based on the latest "hot tip"? 
I think there is some room here, but really the stock price of RY depends on what those "other guys" do. Unless you do a better job picking companies, or you get luckier with your timing, you're looking at the same returns as they have.

For example, are some blue chips being unfairly driven down to bargain levels when index investors are bailing? 
Yes, however there are speculators that sit there playing the edges trying to take advantage of the price jumps when companies move on and off an index.
Many people try to exploit that opportunity, which will shrink the value of trying to do so, same with every other strategy that depends on other people making valuation mistakes.

I think that's the flaw in almost every investment strategy, beating the market is saying you think you are smarter than the other guy, and they made a mistake on the price they'll willing to trade for.

Why buy company A instead of company B? Can anyone think of a reason other than it's underpriced (the seller mispriced it) based on some valueation criteria such as PE, book value, growth rate etc?


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## OptsyEagle (Nov 29, 2009)

The answer is yes and no. Better put, some will do better and some will not. The average investor, by laws of math, must underperform the averages, due to fees, taxes and bid/ask spreads. We all know this or should know this. Some try to forget this. In any event, the average investors results are going to be "normally distributed", where the majority do very close to the market averages and a smaller portion of the group do a lot better and a lot worse. The standard deviation of these results will reduce as the time frame is increased (1 yr versus 10 yr performance). Since you are one person, you're results cannot be in every section of this results curve. If you say you are doing better then the average investor, then I suspect there is probably someone doing worse then the average investor. 

The problem one has here is confirming that one's personal results are "truly" coming from some distinct advantage. The best ones we like to recite is that it is from being smarter then the rest or doing more research then the rest or getting better advice then the rest. The alternative explaination is simply being "luckier" then the rest.

Once one looks at each of explainations one should eventually conclude that it is most likely coming from luck. You may have some more advantages then one had 20 years ago, but they didn't take any away from Goldman Sachs. I doubt you are smarter then Goldman Sachs. I doubt you do better research or put in more person/hours then Goldman Sachs does on their portfolio and you can't get better advice from the people then the advice they give themselves. 

We could go on here, but trust me. As you put more and more years into your portfolio and you get smarter and smarter and work harder and harder, you results will, like most people, will move closer and closer to the averages (unless you are an idiot, and I don't think you are). When you subtract your fees and expenses, you will find, like 99.9% of the rest, that you probably would have been slightly better off in an index portfolio.

Like me, you probably still will not do it. Hey, maybe we will be the guys who fall into the 0.001% group, who truly are smarter and work harder, etc., etc. That is just my opinion.


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## SkyFall (Jun 19, 2012)

So according to you, let say I'm a value investor...true meaning of value investor as Benjamin Graham as define it....If I am doing better then the average I'm purely lucky!?


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## riseofamillionaire (Feb 23, 2012)

I think its always been possible for the little guy to do exceptional with stocks and outperform - just the media/ mutual fund industry would like you to think otherwise, which is probably why people have that misconception that the 'little guy can't win'

The little guy has the advantage of not having a portfolio director looking over your shoulder. It allows competent small investors to have the freedom to own small thinly traded names and avoid benchmarking. Instead of worrying about sector wieghtings, small investors can simply just own the best companies.


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## MrMatt (Dec 21, 2011)

SkyFall said:


> So according to you, let say I'm a value investor...true meaning of value investor as Benjamin Graham as define it....If I am doing better then the average I'm purely lucky!?


Better than the comparable index/group of investors, yes you're just lucky.


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## scomac (Aug 22, 2009)

MrMatt said:


> Better than the comparable index/group of investors, yes you're just lucky.


I always said I'd rather be lucky than good! :wink:


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## Investor72 (Jun 3, 2012)

The reason individual stock picker can out performs the index is because not every business is equal. There're superior businesses. The key is to identify them. It's stupid if a person doesn't even try to do it and give up before starting just because someone told them most can't do it. You can see the big differece in performance vs the index in a very short period of time. It'll do so consistantly if you own the right businesses.

The DIY portfolio is just a small subset of the whole index. Subset doesn't equal the whole market. 
Saying DIY portfolio can't beat the market is like saying, the average grade of the class is only 80, you can't have a score of 90 or 100 .


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## MrMatt (Dec 21, 2011)

Investor72 said:


> The reason individual stock picker can out performs the index is because not every business is equal. There're superior businesses. The key is to identify them. It's stupid if a person doesn't even try to do it and give up before starting just because someone told them most can't do it. You can see the big differece in performance vs the index in a very short period of time. It'll do so consistantly if you own the right businesses.
> 
> The DIY portfolio is just a small subset of the whole index. Subset doesn't equal the whole market.
> Saying DIY portfolio can't beat the market is like saying, the average grade of the class is only 80, you can't have a score of 90 or 100 .


2 Rebuttal points.
If the business is superior, it will command a higher price, that's one reason the Canadian banks (for example) all have different valuation ratios, some are simply considered "better" than the other.

If the average grade is 80, and you're the same intelligence, it's quite unlikely that you're going to have a score of 90 or 100. I don't doubt that if you're smarter and more knowledgeable you're going to get a higher grade, but do you think you're smarter and more knowledgeable than millions of other investors?

Most people aren't smarter and better informed, and even IF they are it will be hard for them to overcome the higher fees and disadvantage of limited time, most of us are quite honestly better off just indexing.


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## Investor72 (Jun 3, 2012)

MrMatt said:


> 2 Rebuttal points.
> If the business is superior, it will command a higher price, that's one reason the Canadian banks (for example) all have different valuation ratios, some are simply considered "better" than the other.
> 
> If the average grade is 80, and you're the same intelligence, it's quite unlikely that you're going to have a score of 90 or 100. I don't doubt that if you're smarter and more knowledgeable you're going to get a higher grade, but do you think you're smarter and more knowledgeable than millions of other investors?
> ...


Superior business commands a higher price e.g PE but the higher price can't stop the future performance from this business. If the business continues to perform, it's PE ratio will stay relative the same, thus it's future price appreciation will remain dependent on the future business profitibility. In addition, even superior stocks go on fire sale once every few years. Superior stocks is less volatile. They go down less during down term and continue to rise during bull market. In my observation, except extremely high growth stock, good quality stocks rarely command a large premium for it's stock price. What's the PE of TSX again? I can find many good business stocks less than the PE of 20. 

I think I am doing ok when my portfolio diverges 5% from the index per year including trading fee. I trade a few times a year so my fee is not that bad. And I don't think it takes a lot a time to trade a few times a year. 

This is true. It's also true that 10% of people own 90% of the wealth but I don't think it's right to tell the poor 90% that you can't be rich because only 10% are rich so they give up trying,. 
You may as well stop going to school and work at walmart if you're born poor.


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## londoncalling (Sep 17, 2011)

at 4.95 a trade my fees are way less than the MER of an index or ETF on a long term basis. If I purchase an equal # of shares of the big 5 banks it costs me about 25 bucks once and only once as opposed to an annual percentage. back to the OP... Yes it is possible to beat the index... But it is not possible for all of us to beat the index... 

Scomac: I was always told you have to be good to get lucky :encouragement:


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## Financial Cents (Jul 22, 2010)

Avoid excessive trading. Avoid high cost products and fees. Buy when others are selling. Avoid "story" stocks. Avoid GICs. I think you'll do just fine.


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## cannadian (Dec 30, 2011)

Wait, MrMatt - are you arguing that beating indexes is purely a result of luck and that it's difficult if not impossible to beat institutions etc?

If so, I would argue that little guys have a few key advantages.

1. We can buy small, illiquid companies that large institutions cannot - there's often value in these companies that larger institutions cannot exploit until their stock is more liquid.
2. Often times large hedge funds and mutual funds aren't focussed on the long term. They're focussed on keeping people in the fund, and your average investor becomes very fearful when they see their portfolio declining in value and pull out. So many of these institutional guys are focussed on keeping their clients happy as opposed to maximizing long term results. The thing with value/contrarian investing is you can easily lose 20%+ for a year or 2 before the market starts to realize the value - hedge funds and mutual funds usually cannot take that.
3. People tend to make decisions not based on logic, but rather emotions and biases. Evolutionary psychology STRONGLY backs this up. While over the long run our markets may be somewhat efficient, in the near term they are not. Objective people can gain an advantage I believe, or more subjective people who may be more susceptible to the emotions the market can create.


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## Cal (Jun 17, 2009)

And the little guy doesn't have to be a certain % invested or not, and doesn't have to worry about balance as much, as his money can follow any opportunity.


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## lonewolf (Jun 12, 2012)

My eye cant see any difference in structure of the price patterns in the stock indexes. Even with all the modern technology as of late the fractal structure seams the same.


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## Assetologist (Apr 19, 2009)

+1

I agree fully! (with cannadian and cal).

We, the small DIYers, do have advantages; patience, agility, conviction as well as unique challenges. Like most endeavors requiring a substantial skill set and aptitude, we need to learn our own cadence in order to establish successful patterning.


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## riseofamillionaire (Feb 23, 2012)

Investor72 said:


> Superior business commands a higher price e.g PE but the higher price can't stop the future performance from this business. If the business continues to perform, it's PE ratio will stay relative the same, thus it's future price appreciation will remain dependent on the future business profitibility. In addition, even superior stocks go on fire sale once every few years. Superior stocks is less volatile. They go down less during down term and continue to rise during bull market. In my observation, except extremely high growth stock, good quality stocks rarely command a large premium for it's stock price. What's the PE of TSX again? I can find many good business stocks less than the PE of 20.
> 
> I think I am doing ok when my portfolio diverges 5% from the index per year including trading fee. I trade a few times a year so my fee is not that bad. And I don't think it takes a lot a time to trade a few times a year.
> 
> ...


Well put. I find that the 'special' stocks usually command a double digit p/e. One can get into trouble owning too many 'cheap' single digit p/e stocks, although some cheap opportunities exist. I find my better winners are usually not obviously 'cheap' and even considered expensive by some investors.


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## tylC (Jul 2, 2012)

I totally agree that a small investor, or anyone for that matter can beat the market, but realistically they must be the minority by a large margin, simply because the stock market is a net-negative arena, meaning winners profit less than the amount losers lose, due to taxes and transaction feeds

1.) You seem to be putting a lot of focus on beating the "big guys", while statistically, it is extremely rare for the "big guys" to beat the market on a consistent basis. Small investors in general have significant advantages over the institutional investors, due to being free from regulations, and small capital. 

2.) The advantage of investing in an index is the drastically decreased taxes/transaction fees, considering you do not jump in and out (for taxes: imagine if you sold at a profit today, paid taxes/transaction fees, you wouldn't be able to buy back the same amount of stocks tomorrow at the same price if you wanted to)

3.) In order to beat the market, the investor needs to first identify what their advantage is compared to the rest of the market, be it more technically advanced, better access to information, more thorough analysis of company financials, etc. By comparing your record to the market averages, it is equivalent to shorting all the stocks you do not own in the indexes, which are supposedly successful, profitable businesses

Considering the above points, while I still agree with you that small investors can definitely beat the market, and they hold significant advantages versus the institutional investors, it is extremely rare for a small investor to beat the indexes over the long run due to time constraints, lack of incentives, etc. If you cannot clearly identify why you hold an advantage over the majority of the market, I'm afraid that your stint of beating the market is the luck of the draw, and will probably be better off with an index fund.


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## 44545 (Feb 14, 2012)

Cannadian and others have detailed some of the advantages the little guy has.

My feeling is that the big guys are well aware of their own limitations. The difference is, the little guys don't know theirs and will lose the game by making too many errors of ignorance.

Most would be better off in index funds - most people, not everyone.



tylC said:


> ...it is extremely rare for a small investor to beat the indexes over the long run due to time constraints, lack of incentives, etc. *If you cannot clearly identify why you hold an advantage over the majority of the market, I'm afraid that your stint of beating the market is the luck of the draw, and will probably be better off with an index fund.*


Agreed 100%.


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## Spidey (May 11, 2009)

I notice one disadvantage the majority of the market seems to have is "looking in the rear-view mirror" investing. Even many of the respected analysts on BNN seem to suffer from this and I hear one after another say that now is the time to invest in very safe stocks such as utilities or pipelines. Could be, but it seems to me that was excellent advice for about a year ago, when coincidentally I don't recall many of them giving such advice. My biggest, but by far not only criteria, is what the insiders are doing. Many insiders are currently selling what the analysts are currently telling us to buy.


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## cannadian (Dec 30, 2011)

Spidey said:


> I notice one disadvantage the minority of the market seems to have is "looking in the rear-view mirror" investing. Even many of the respected analysts on BNN seem to suffer from this and I hear one after another say that now is the time to invest in very safe stocks such as utilities or pipelines. Could be, but it seems to me that was excellent advice for about a year ago, when coincidentally I don't recall many of them giving such advice. My biggest, but by far not only criteria, is what the insiders are doing. Many insiders are currently selling what the analysts are currently telling us to buy.


Man, this is so frusterating to me.

In Oct when the market tanked to below 11,000 on the DOW everybody advises people to sell their stocks "now is NOT the time to be in equities, people!" Then shortly thereafter, when the market popped up to above 13,000, suddenly everybody is bullish and advising you to buy stocks.

If you follow the news you'll almost invariably end up buying high and selling low!


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## doctrine (Sep 30, 2011)

A small investor can buy great small caps that even a $10 million dollar fund would have trouble getting into. A small investor doesn't have to sell because other people are selling. There are hundreds of reasons why you can do well for yourselves. It mostly involves not doing what everyone else is doing. Got to love every second guest on BNN who advocates being in cash.


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## Belguy (May 24, 2010)

Having been in this game for a long time now, I still feel that there is something to be said for staying fully invested through all market conditions and basically only buying or selling for rebalancing purposes as required.

This assumes that you can't win long term by trying to time the markets or listening to the confusing points of view of the pundits and that, when making the original choices of individual investments, you did your homework and chose well.

Of course, the most important thing is to get your initial asset allocation correct taking into account your own particular personality and circumstances.

I have posted a lot of bad news on this forum but, aside from one adjustment in my asset allocation because of advancing age, the news has never been a reason to sell an investment which I do only for rebalancing purposes. Then too, one of my other investment objectives is to keep my trading fees to an absolute minimum as they can have an adverse affect on your long term returns as well.

That said, I do get some entertainment out of watching all of the market timers on this forum and can only wish them luck with that strategy over the long term.


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## 44545 (Feb 14, 2012)

cannadian said:


> Man, this is so frusterating to me.
> 
> In Oct when the market tanked to below 11,000 on the DOW everybody advises people to sell their stocks "now is NOT the time to be in equities, people!" Then shortly thereafter, when the market popped up to above 13,000, suddenly everybody is bullish and advising you to buy stocks.
> 
> If you follow the news you'll almost invariably end up buying high and selling low!


What you guys are describing seems to be "contrarian investing" based on the books I've read on on the subject of investing.
"Be greedy when others are fearful and fearful when others are greedy." This makes perfect sense - it would result in buying low and selling high.

While "market timing" may not be a smart choice, "dollar cost averaging" is brilliant.


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## doctrine (Sep 30, 2011)

I don't think anyone is suggesting this concept is truly contrarian. It's just about staying invested. You don't have to try to time the Dow going to 11,000. Just make sure you don't stop investing, and the numbers will take care of themselves.


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## buhhy (Nov 23, 2011)

CJOttawa said:


> Cannadian and others have detailed some of the advantages the little guy has.
> 
> My feeling is that the big guys are well aware of their own limitations. The difference is, the little guys don't know theirs and will lose the game by making too many errors of ignorance.
> 
> ...


Everyone thinks they have an advantage. It is very common for people to overestimate their own abilities. It's why over 70% of people rate themselves better-than-average drivers, and why the fish keep coming back to play poker. Just like poker, investing is zero-sum relative to the average economic growth. Hence more people will under-perform than over-perform. Also, I feel beating the "big guys" is a bit of a red herring; it's more about beating the average market, since most big funds under-perform anyways.

Also, luck is super large aspect.


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## Eclectic12 (Oct 20, 2010)

CJOttawa said:


> Cannadian and others have detailed some of the advantages the little guy has.
> 
> My feeling is that the big guys are well aware of their own limitations. The difference is, the little guys don't know theirs and will lose the game by making too many errors of ignorance ...


*shrug* - so how is it a help for the big guy to know that he is forced into a bad move?

As for the little guys that don't know their limitations - the ones I've run into have crashed and burned so that they either are going the passive route or have left the market.


Cheers


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## Eclectic12 (Oct 20, 2010)

buhhy said:


> Everyone thinks they have an advantage. It is very common for people to overestimate their own abilities ... Just like poker, investing is zero-sum relative to the average economic growth. Hence more people will under-perform than over-perform.
> 
> Also, I feel beating the "big guys" is a bit of a red herring ...


Hmmm ... doesn't zero-sum mean that just as many out perform as under perform?


As for beating the "big guys" - part of the problem is the measurement. With the makeup of the indexes changing all of the time, the index versus anyone (i.e. big or small) is an apples to oranges comparison, IMO.


Cheers


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## Young&Ambitious (Aug 11, 2010)

There is benefit though in benchmarking your return relative to an index or professionally managed mutual fund. One should know if their efforts are worthwhile or if they would be better off placing their funds in an index or mutual fund etc. 

My realized unannualized average yield ytd is 12.76% (and I'm a newbie at this), so I do believe that the little guy can win


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## HaroldCrump (Jun 10, 2009)

Young&Ambitious said:


> My unannualized average yield ytd is 12.76% (and I'm a newbie at this), so I do believe that the little guy can win


I am not disagreeing, but average yield doesn't mean much.
As we know, it is possible to buy stocks (or unit trusts) that yield 9% but lose share value at the same rate or faster.
The only thing that matters is total return.


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## Young&Ambitious (Aug 11, 2010)

My apologies for the lack of clarity I meant realized gain %, not dividend %.


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## Eclectic12 (Oct 20, 2010)

Young&Ambitious said:


> There is benefit though in benchmarking your return relative to an index or professionally managed mutual fund. One should know if their efforts are worthwhile or if they would be better off placing their funds in an index or mutual fund etc. ...


I'm not against measuring - I just wonder measuring against a moving target that could have a different makeup each quarter is worthwhile. 

For example, the TSX 60 announced in the sept 2011 update a drop of four stocks and an addition of three stocks (a 5% change in the makeup of that index).


Cheers


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## Belguy (May 24, 2010)

The shorter the time frame, the more investors there are that have beaten market returns. The proof of the pudding comes in longer term comparisons and the longer the term, the fewer market beaters there are.


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## lonewolf (Jun 12, 2012)

CJottawa

Regarding dollar cost averaging. I have not run the numbers but I kinda think it could be improved i.e., if an investor was going to invest 400 a month into an index such as spy. Instead of always investing the full 400 dollars. only invest 100 dollars if the market is the same or higher then the previous month. Then for each percentage drop invest 10 dollars extra. (but set a max limit)


If market is same or higher from previous month invest 100 dollars that month
If the market is down 10% from the previous month invest 200 dollars that month. 
If the market is down 20% the next month invest 300 dollars for that month
If the market is down 30% or more invest the limit of 400 dollars for that month.
Iam sure someone out there has done a study as to if this makes any differnce & if it does the best percentages to use based on past performance.

I think this would work best with stocks due to the fact a lot of drops will start of slow then pick up speed & spike lower to a bottom. Often the rally up from a bottom is swift & will slow down as the market tops. So a high percentage gain for a month might not be the best time to reduce the amount being added to the fund or take money out as value cost averaging would have the investor do. (value cost averaging explained below)

Value cost averaging I think would work better for commodities like gold because they often panic into a price high.

Value cost averaging is somewhat similiar to dollar cost averaging. Money is added or subtracted @ a regular interval so the value of the account grows by the same amount each month.


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## Navigate Sensibly (Oct 24, 2011)

Belguy said:


> The shorter the time frame, the more investors there are that have beaten market returns. The proof of the pudding comes in longer term comparisons and the longer the term, the fewer market beaters there are.


Bulguy is right! I agree.


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## Rusty O'Toole (Feb 1, 2012)

It depends what you mean by beat the market. But yes, it has always been possible for the small investor to do well. Some of them, well enough to become big investors. Warren Buffet started with a couple thousand $$$$ he saved up from his paper route and selling used golf balls. Later he started a fund for a few neighbors and acquaintances with $160,000 of investors' money. So far as I know, the rest of his billions (Berkshire Hathaway) are reinvested dividends and profits. I don't believe he has ever held a job in the normal sense of working for wages.

The big problem is these giant brains we are so proud of. It has been proven time and again that our own psychology is the biggest bar to investing success. Warren Buffet has spoken of this, Sir John Templeton one of the greatest investors of all time has spoken of it. So did Jesse Livermore in his roman a clef Reminiscences of a Stock Market Operator.

Professor Van K. Tharp has made a lifetime study of the psychology of the successful investor. He discusses it in his books, Trade Your Way to Financial Freedom and Super Trader. You can go to him and take a class, to learn how to stop doing the stupid moves that cost you so much money and do the things that make money. All of them counter intuitive and very difficult for anyone with a normal brain.

There are several good ways of investing that have proven profitable to the small investor. Warren Buffet recommends the value approach, in other words shopping for bargains. He learned it from Benjamin Graham, who invented security analysis as we know it today. Many other people have made very good, and very safe returns using the same approach. But it is very hard to get anyone to do it. It just seems so boring. How many people do you think are aware that Warren Buffet is the most successful living stock market investor, a self made multi billionaire? He has never made any secret of how he made his money. He recommends Graham's books and his investing approach at every opportunity. How many people do you know who have taken his advice? Me either. But a lot of people use the value approach successfully and I never heard of anyone who lost any substantial amount of money at it.

Another very good way involves market timing. If you had got into the market in 2006, got out when it peaked in August 2008, got back in in March 2009, got out last fall, and got back in a month ago you would have nearly doubled your money vs being down 2 or 3% if you bought and held the S&P. We are talking about 1 trade a year. This is what I am doing right now. It can be as simple as using the 200 day 50 day moving averages. But once again, it is very hard to sell when everything has been doing great and it looks like a minor correction, and it is very hard to buy when everything is stinko and it looks like it will never come back. There go our giant brains again lousing us up.

There are other approaches too. You have to find one that is compatible with your temperament and abilities. You have to learn it cold, and practice it until you can use it with confidence even when your emotions are screaming at you not to, and every pundit on TV says you are wrong and all your broke friends are laughing at you.

Because everyone knows how to make money. Buy low, sell high right? Well when prices are low is when everyone is selling and only a fool would buy. And high prices means everyone is buying with both hands and only a fool would sell. You have to be able to see farther than the herd and buy and sell when logic, reason and math tell you not by emotions and what your broke friends say.


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## Rusty O'Toole (Feb 1, 2012)

lonewolf said:


> CJottawa
> 
> Regarding dollar cost averaging. I have not run the numbers but I kinda think it could be improved i.e., if an investor was going to invest 400 a month into an index such as spy. Instead of always investing the full 400 dollars. only invest 100 dollars if the market is the same or higher then the previous month. Then for each percentage drop invest 10 dollars extra. (but set a max limit)
> 
> ...


You should look up the work of Robert Lichello. He wrote 2 books using the exact approach you describe. Superpower Investing was the first, How to make a Million Dollars in the Stock Market - Automatically was the second.

He worked all this out in the seventies by hand. Doing very much like you describe using a more sophisticated formula.


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