Secondly, if it’s so easy to beat the market, how come so few mutual funds are able to do so? I mean, that’s the whole IDEA of mutual funds, isn’t it? To have an educated, experienced, intelligent mind making rational, wise trades in order to earn a better return? After all, if index funds are forced to hold dogs like Circuit City and GM, whereas mutual funds have the flexibility to ditch such losers and only buy winners, how come mutual funds do so poorly? How come so few (less than 5%) are able to beat the market consistently?

If those highly-paid, highly-educated geniuses can’t even beat the market, what hope do YOU have?

I agree with Buffet. I agree that index funds are the smartest way to go for most investors. Most stock-picking is just gambling and mutual funds are burdened by higher costs. But let’s at least admit that there are some things terribly wrong with our assumptions about index funds, namely : “The market ALWAYS go up in the long-term!”

Our personal finance “experts” have misconstrued these ideas and argued that passively throwing all your money in some equity index fund and then forgetting about it is how to invest.

My point is if we’re going to talk about index funds, let’s at least realize that there are other index funds besides equities – and not advocate that people just throw their money in a big pot and then forget about it.

The market doesn’t always go up.

Your house really isn’t an investment. (It’s a place to live.)

An equity index fund is not a diversified enough (news flash: It’s all equities).

Referring to Buffet: Is he a “fool” because he actually tries to invest his money in companies that are profitable? Or do you think he became one of the richest men in the world by buying a little piece of every company?

Let’s stop putting the equity index fund on a pedestal and recognize it has incredible limitations. I agree that they are generally the smartest way to invest, but they aren’t the ONLY way to invest. I bet most readers don’t even realize there is a bond index fund (Vanguard’s VBMFX) that has had fantastic returns over the last ten years, as opposed to the abysmal equity index fund.

But then again, maybe they’re all wrong, and you anonymous finance blog commenters are right.

I guess it’s up to the reader to decide which is the more credible opinion. Read some books and decide for yourself. Believing you can consistently beat the market is arrogant, ignorant, and will cost you an enormous amount of money.

Saying that it is mathematically 50/50 for active investors to beat the market is to treat stock picking like you’re flipping a coin. Do you think someone with a clue about finances merely flips a coin about decisions – “Hmm… let me think about this. I could buy Circuit City or I could buy Best Buy. I could buy General Motors or I could buy Toyota. Let me just flip this coin!”

I agree that index funds could very well be the way for most people to invest. But let’s not treat investing as if it should be some passive investment that you make and ignore thinking only “long-term.” The problem with this passive investment approach is every supposed personal finance “expert” always focuses on Equity Index funds. There are other types of assets to invest in, and if you’re throwing all your money in equities and thinking you’re diversified then you are SADLY mistaken.

Just read Mateo’s comment (#36). That’s EXACTLY what type of “investing” you should be teaching to those who want to learn.

And George’s comment (#31) explains exactly why just having something that follows the market is not necessarily the smartest idea. I personally agree with investing in index funds, but I’m not so ignorant as to see their incredible limitations, as they have to buy all the crap companies along with the successful ones in order to represent the “entire market.”

“investing is a choice between investing in equities actively (or stockpicking) or passively (as in index funds or their equivalent)” is a false dichotomy.

The choice isn’t between picking stocks and holding stuff like VFIN – it is a question of how long (or short) you want to be in every asset class – equities, debt, commodities, currencies.

Knowledge is power. Passivity is a great way to get negative returns and an underwater house.

You do make a good point about the value and potential of a side job. Side jobs have benefitted me too so I shouldn’t have denigrated them. I still think investing skills are more useful, though.

I suppose it depends on your tolerance for risks. Those skills at investing may pay off. They may pay off big. Likewise, working a job will pay off small, and may pay off big. I’d be interested to see stories of VPs starting off as part-timers vs dabblers consistently crushing the market. Of course, that’s all anecdotal and there’s far more part-time employees than people in the stock market. Either way, you can spend your time well or badly. You can get lucky, or not.

I think it goes back to your passion, if I spend 600 hours on the stock market and don’t do very well/don’t enjoy it – am I any better off than doing some other thing well for 600 hours? In your case, you’ve done well trading and can advocate your position. In my case, I’ve done a share of “menial” labor and can attest to the skills and mindsets that experience brings to the table. The dividends for *me* have been quite large, but I can’t say I wouldn’t have done even better funneling that energy into investing. I’ll admit I may overvalue the consistency of a paycheck. Different strokes for different folks, and all that.

Something else just occurred to me. I’m an engineer, so I work with people of that ilk. Some of them (many smarter than I), look at the stock market and go: “Hey this is a system I can figure out. I solve obscenely complex problems all the time with my amazing analytical skills.” That doesn’t seem to go well. Maybe they don’t put enough time in? Is your argument more of the “It’s possible to make a lot of money investing small sums” or “With sufficient practice, anyone can make a lot of money investing small sums”? The former seems undoubtedly true, the latter sounds like a book deal.

Say I told Trent that blogging is a waste of time because everyone might learn to write well and think of great ideas, and then he’ll have too much competition to make money. Maybe, but how likely is that and what does it have to do with the situation now?

SteveJ, Trent’s whole point was that successful active investors don’t make much per hour unless they have a lot of money. I responded that in the long run, successful investors see a good return on their time, and that the bad numbers and assumptions in his post prevented him from concluding as I did. I even suggested that successful investing is more valuable for people without a lot of money or means to earn money, since I agree with him that rich people have many more routes to wealth besides public stocks. Although investing small sums pays as little as a part-time job, the skills and mindsets acquired through practice pay much larger dividends later. The same can’t be said for the job.

The individual investor, on the other hand, can chuck them as soon as the loose rail is spotted.

Index funds and mutual funds have their hands tied, both in practical terms and regulatory terms, as to how much of a position they can buy/sell as their high volume actions greatly influence the market price of a single security.

The individual investor does not have their hands tied.

25 hours per week is an absurdly high number. It is, in reality, no higher than 7 and more likely around 1-2 hours per week in my case.

I have a 15 year track record of beating the S&P500 and I’m not a “super” investor with huge sums, but it’s definitely been worthwhile. To learn, I merely kept a paper account for about a year before putting money in.

I didn’t get the vibe you did, that successful stock traders are not paid well. I thought Trent’s concession was that if you had the money, it could be worthwhile to be an active investor. It seems to me that a successful trader would have the money to invest, thus falling neatly outside of Trent’s main argument. Lousy writing tends to follow when you make allowances for every expert/exceptional case. Scott Adams has an acronym for this: BUCTOE (But Of Course There Are Obvious Exceptions). Making homemade laundry detergent is decidedly unfrugal if you won free laundry service for life. Oblivious investing would be hard to stomach if you’re an active trader. I think if trading is your passion, you should put in the time and risk.

Quoting your initial lines on the article here:
“You devote an hour a week to studying each stock in detail, so you know what’s going on with that company. You also devote five hours a week to finding new, worthwhile companies to invest in, potentially replacing the slots in your portfolio”

I believe you would have counted 6 hrs/week (from the above), that translated to roughly 25 hrs/month and not 25 hrs/week!! And if that’s a number you thought you would suggest, that probably makes more sense for an individual stock investor. But now then, look at your revised numbers!

Assuming 1% better return and that your calculations for difference are correct over 10 years ($10,037.11), that would be about $3.35/hr (and not $0.77/hr) over 10 years (for 25 hrs a month, 300 hrs a year, 3000 hrs for 10 years)!!

And if you look at 30 years ($286,295.18 difference), it would be a nice return of $32/hour – I would take that anytime!! And that something that adds value to my time (in terms of knowledge) than having spent that time elsewhere is probably a no brainer.

Bhavin

We can’t all be “above average.”

There’s no magic, faceless entity on the other end of all those trades occurring in the stock market. The stock market is nothing more than a bunch of people trading with EACH OTHER. And if everyone put in the 600 hours of effort “honing a skill” as you suggest, what do you think would happen? Would EVERYBODY suddenly, magically be better traders, and somehow EVERYBODY would defy all logic and math and achieve “above average” returns?

Don’t you see? It just doesn’t make sense. The market is efficient. We can’t all be above average. The best tactic is to take the guaranteed average and plan your future accordingly.

I do refer you to point #3 in my original comment, though: “Successful traders are often better at it than other things.” If you, Trent and I spent an equal amount of time learning stocks, I would probably do better than both of you, just like Trent would probably make the best blog and you’d be the best __________. I don’t object to the idea that many people are unfit to actively invest. I object to the idea that successful active investors see low returns for their time. I object because this article misrepresents time spent, outstanding returns and opportunity cost.

Me personally, I’d work a part time job for 600 hours to double up that $3000. 100% return for 12 hours of work a week. Or (hotly debated) number of hours a week to maybe not lose money.

I thought the key theme of personal finance is that shortcuts don’t work?

And yet, you still get these 23-year old kids, making their first foray into the world of investing, convinced that if they just read enough finance websites, with their 2-hour old press releases and 20-minute old stock quotes, that somehow THEY can be in that mathematical minority that will beat the average this year.

And next year. And the year after that. And somehow, they’re magically, super-intelligent investors that will be in that minority “above average” crowed year after year, even though they have no formal training in finance and lack access to the instantaneous information available to full-time professional money managers.

Is it arrogance? Stupidity? Greed? A combination of all three?