There are many newsletters, advisors, and other providers of financial/investment information or services that claim (usually backed up by back-testing results) that they provide a way to beat/outperform the overall market. Are these all scams? Is it true that it's virtually impossible to beat the market with any reasonable amount of consistently over time?
2 Answers
Is it true that it's virtually impossible to beat the market with any reasonable amount of consistently over time?
Yes and No. Warren Buffet has a excellent track record. Some of this is self fulfilling prophecy. Given his stature, if he buys any stock, everyone believes it is a good pick and start buying, demand supply results in price going up in turn reinforcing the belief that stocks picked by Warren Buffet go up ...
There are quite a few studies that indicate that only 1% of actively managed fund perform better than Index / market. The funds that perform better for a given year, under perform the next year and some other fund performs better. So on a 5 year basis, one would find very few funds that bet markets consistently and given that there are tons of funds in market, picking one that would beet the market in advance is difficult.
Are these all scams?
To a large extent these are mis-sold / quoted. Often the fees are not included in the comparison giving the false impression of the funds doing better.
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1But again, thats on an annual basis. Warren Buffets first funds were up thousands up percentages in the late 60s. They would still be beating the market if that money was parked in a checking account ever since. Someone can have a strategy, just like someone can buy a house in the right neighborhood at the right time and flip it in less than a year. They beat the marke and dont care what you think theyll do next year, or the next 20. Theyll be on to the next strategy with all that money they have.– CQMNov 9, 2017 at 5:27
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@Dheer Can you provide a link to one or two of the studies you mentioned?– NosracNov 9, 2017 at 13:47
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Warren Buffet probably takes the Warren Buffet Effect into account when evaluating a stock for purchase.– chepnerNov 9, 2017 at 15:51
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A lot of the back tested investments benefit from survivor bias. At any one time many investment vehicles are created and the ones that underperform lie fallow while the ones that overperformed get touted. Future returns thus tend to underperform historicals for any investment touted.– dougNov 9, 2017 at 23:03
Are these all scams? Is it true that it's virtually impossible to beat the market with any reasonable amount of consistently over time?
While most of those that try to sell you their strategy might be, there are some funds who really do consistently beat the market. Look at e.g. Renaissance Technologies.
"From 2001 through 2013, the fund’s worst year was a 21 percent gain, after subtracting fees. Medallion reaped a 98.2 percent gain in 2008, the year the Standard & Poor’s 500 Index lost 38.5 percent."
"The Medallion fund is considered to be one of the most successful hedge funds ever. It has averaged a 71.8% annual return, before fees, from 1994 through mid-2014."
However, looking at how they operate, you might as well say it is "virtually impossible", at least for anyone not having that level of concentrated brain and processing power.
provide a way to beat/outperform the overall marketYou need to ask yourself why these providers don't do it themselves and make a killing.