Don’t invest before reading this: learn to beat Wall Street at the game


Have you ever heard the advice “don’t invest, you’ll never beat the pros”? It’s pretty scary for a first time investor, the thought that you have to compete with all the people playing the markets as their full time job.

I’m here to tell you there’s always a way for the little guy to beat the pros. The Oakland Athletics have remained competitive with the New York Yankees in Major League Baseball on a budget just one tenth of the size. And just look at what’s happened for Leicester City in the BPL season of 2015/2016.

To be able to beat the “pros” at their game, we need to examine what their advantages are.

The guy at the top is really smart

If you get a chance to meet one of the rock-star, Wolf Of Wall Street kind of guys, I guarantee that you’ll be impressed. You can’t be a doofus and still convince people to invest million, or sometimes billions of dollars with you. The best managers make you feel like you’re the one who’s lucky to to have them handling your money for you. That’s how good they are at persuading you to part with your money.

Minions, more minions than the eye can see

They can employ tons of professional drones to oversee different aspects of the portfolio. And access to all sorts of experts that can provide their own analysis. Research comes in real-time and they can tune into all sorts of professional investment services that just aren’t available to the average man on the street.

First dibs on any new products

They have better access to more financial products. Let’s illustrate this with an example people are familiar with. The initial public offering or “IPO”. It’s really a misnomer because there’s nothing initial about it. We should call it the “Leftover Public Offering”. Because there were three, probably four rounds where they offered shares of the company to large investors before you even heard about the company. Of course, they all expect to be compensated for the bigger risks they are undertaking. And how do they get compensated? By using the IPO to sell shares to the little guy like you and me who’s late to the party.

So the institutional investor has access to more money, more people and  more products. There’s simply no way that you or me can compete on those fronts. The guys on Wall Street (and they are almost all guys) work an ungodly amount and they pretty much know what they are doing. Now that we’re quite clear on their advantages, we have to know the game Wall Street is playing.

Short term profit taking

Funds are always, always suffering from “size” issues. ahem. It’s inevitable, they keep looking around at the people around them. Every managed fund has a sales pitch that is about how they beat all the other funds, as well as the S&P500, the DJIA, the FTSE, SIMSCI, MSCI and even their own fund’s performance last year to bring you, the investor, unprecedented returns. There is a lot of pressure to deliver results so they’re only thinking about making money between now and next Thursday.

The business of delivering “alpha”

“Alpha” can simply be explained as additional return on the market. An index fund simply mimics what the market’s overall return is and that’s why they have relatively low fees. An actively managed fund is supposed to deliver “alpha”. You’re paying them more fees and they’re supposed to return you more than just investing the market. They deliver you more money, all you have to do is pay them. But in reality, most funds return you less than the market’s return or negative alpha 😛

Play a different game!

If you’re trying to beat the pros at their own game, trading actively to get short term returns, you will almost always lose out. You simply do not have the same resources as they do. The Oakland Athletics were able to remain competitive with the New York Yankees because they decided not to compete for the same players. This required them to shift their mindset to looking at players who were ignored by the other baseball teams but were formidable together.

In the same way, we can’t compete with Wall Street by emphasizing short term trading returns. The more you trade, the more you play into their hands as the fees are eating away at your returns. To beat them at the game, we have to focus on a different set of rules:

  • Think for the long-term as you don’t have pressure from your investors.
  • Don’t invest to impress others as there is no one to impress.
  • Don’t worry about chasing alpha by “beating the market” or your peers

In short, we need a long time period and invest in a low-cost index fund that mimics the market’s return. I’ve written step-by-step guide on how to do that here.

PS: If you need more information on investing as the little guy:

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