The author touts an algorithmic strategy with absurd returns (63% annualized!) but fails to acknowledge the glaring issue of overfitting. Imagine watching 1,000 basketball shots taken by a player over their career. With enough data slicing, you might find a pattern: every time they made three consecutive shots from the left corner, their next shot from the top of the key had a 70% success rate. This “strategy” only works in hindsight and has no predictive value for future games. Similarly, the author’s algorithmic strategy is overfitted to past market conditions—it looks brilliant on paper but falls apart when faced with real-world unpredictability. Markets aren’t governed by static rules; they’re driven by human behavior, innovation, and macro forces. Relying on contrived patterns is stupid. True investing requires understanding the underlying business, not gambling on statistical artifacts.
2. Bad Businesses vs. Good Ones: Due Diligence Matters
The author uses examples like Peloton, Zoom, and Snap to argue against stock picking, but these failures only highlight bad investments, not flaws in the concept itself. Value investors don’t chase hype; we buy companies with durable competitive advantages, strong financials, and a margin of safety. If you bought Tesla at $800/share or Zoom during its pandemic peak, that’s your fault—not the market’s. Conversely, buying a company like Coca-Cola in the 1980s or Apple in the early 2000s would have generated life-changing wealth. There’s a reason some businesses thrive while others fail— Do your homework, and you’ll avoid losers. Ignoring bad businesses doesn’t invalidate good ones—it highlights the importance of discernment.
3. Retail Investors Have an Edge Over Fund Managers
The claim that professional fund managers underperform the S&P 500 ignores a critical truth: retail investors actually have structural advantages. Institutions face constraints—liquidity needs, benchmark tracking, committee decision-making—that often force suboptimal choices. Meanwhile, small investors can move nimbly, take concentrated positions, and wait patiently for opportunities without answering to shareholders. Moreover, indexing isn’t inherently superior—it simply reflects the average performance of all participants. If everyone indexed, markets would lose their price-discovery function, creating inefficiencies ripe for exploitation by active investors.
4. Study:
The Bessembinder study claims that only 4% of stocks outperform Treasury bills, but this conclusion is meaningless when you consider the reality of business survival. Studies show that 90-95% of companies fail within just a few years, especially young, unprofitable ones with shaky foundations. These are not investments—it’s like counting lottery tickets as "stocks."
What would actually be relevant is to look at profitable companies, businesses that have generated consistent earnings for years—and compare them to Treasury bills, it does not take a genius to make figure out that this study is a plain joke and have very little relevance.
5. Index Funds:
While index funds offer diversification, they also expose you to hundreds of low-quality businesses dragging down overall returns. Why should my portfolio include zombie companies burning cash or firms with no moat? Indexes are weighted by market capitalization, meaning you’re disproportionately exposed to overvalued giants (e.g., tech darlings in 2021 & 2024). By contrast, selective investing lets you avoid such pitfalls and allocate capital toward truly exceptional businesses. Would you rather own 500 mediocre companies or 10 outstanding ones? Quality matters, and indexing dilutes it.
The author paints a doom-and-gloom picture of stock picking, but his argument boils down to ignorance of proper methodology. Bad investments fail because they’re bad, not because markets are insurmountable. Smart investors who focus on fundamentals, patience, and discipline consistently outperform. Don’t let fearmongering scare you away from buying great companies.
If you don't understand the precise mechanics of how each component of your algorithm drives returns and in what conditions and instead believe religiously in the backtest result to be predictive of the future, then overfitting can certainly be a problem.
But when used correctly, backtesting is a feature, not a bug.
"For algo trading, your rules for making trades are written down and tested according to historical conditions to see how it would have performed.
With stock picking, those rules are in your head. There is no way to backtest your strategy, e.g. companies with low P/E ratios, and see how it would've performed historically."
2. The criteria for successful stock picking--durable competitive advantages, strong financials, and a margin of safety--sound great in theory, but are devilishly hard to define in practice.
The first and third criterion can be highly subjective. Peloton and Zoom, for instance, looked like slam dunks during the pandemic, but turned out to be duds.
Coca-Cola (+268x) is a great example of a company that fits all of these criteria yet still underperformed the S&P 500 (+297x) since 1985. Even if you were patient enough to hold Coca-Cola starting from 1985, you still underperformed the S&P 500, which managed to generate even more life-changing wealth.
As a stock picker, you just don't know how well your heuristics as far as when to buy and sell an investment would've done in the past. You wouldn't know if it underperformed the market.
3. While there are certain aspects where retail investors have an advantage over institutions, it would be deeply naive to assume that professionals and institutions don't have their own massive edge over retail.
Institutions have armies of highly compensated, full-time portfolio managers and analysts and can use machine learning to crunch enormous amounts of historical data and discern patterns in markets.
Some of the so-called disadvantages of institutions, e.g. needing to answer to shareholders, could be advantages when it comes to ensuring good long-term returns and avoiding losses. Without accountability towards outside investors, a retail investor can sit on a losing position forever and lose all their money whereas a professional faces much more pressure to cut losses.
Professionals have far more talent, incentives, and resources than the average retail investor. Just as you wouldn't assume that you're better at basketball or golf than a pro due to the discrepancy in talent, incentives, and resources, it can be dangerous to assume you're better at investing than the pros.
4. Even long-time Buffett investments and profitable consistent earners Coca-Cola (+268x) and American Express (+66x) have underperformed the S&P (+297x) since 1985. There's no question these are great businesses, but over a long enough time scale, it's just hard to beat the index.
5. The "500 mediocre companies vs. 10 outstanding ones" debate is a false dichotomy.
The S&P 500 is more like 30-40 great companies and 450+ average companies. The index is self-rebalancing and momentum-driven, adding to winners and cutting losers. As great companies overperform, their portfolio weight grows larger, while underperformers get quietly removed from the index.
The question when stock picking is whether you can consistently have a higher hit rate and better rebalancing than the index itself over your entire investing career.
I'm humble enough to recognize that I can't consistently pick out the great companies from the mediocre ones. Keep in mind that both Coca-Cola and American Express were mediocre companies compared to the S&P. That's why my belief is that the vast majority of investors would better off not trying to pick individual stocks.
It’s ironic how proponents of algorithmic trading argue that institutions have an inherent advantage over retail investors due to their access to more analysts, machine learning tools, advanced statistics, faster trade execution, and vast datasets—yet simultaneously claim that algorithmic trading outperforms value investing.
Value investing is fundamentally about simplicity and rationality. If your investment thesis can’t be explained to a 12-year-old with a pen and a napkin, it’s too complex. “Investing is simple, but not easy.” The essence of value investing lies in identifying businesses trading below their intrinsic value, understanding them deeply, and holding them patiently until the market recognizes their worth. This approach doesn’t require excessive data, high-frequency trading, or cutting-edge algorithms—it demands discipline, patience, and intellectual honesty. Yet, many institutions prioritize speed, complexity, and short-term results over these timeless principles. Their focus on quarterly performance metrics directly undermines the patient, contrarian mindset required for successful value investing.
Now let’s turn to historical evidence. Private value investors consistently outperform institutional managers, especially in the early stages of their careers when they operate with smaller pools of capital. Consider the following examples:
- Allan Mecham, who began his partnership at just 22, achieved 40% annual returns in his early years.
- Nemcam, a private investor, averaged 45% returns annually over a decade—a feat unmatched by most institutional funds.
- Warren Buffett, himself generated compound annual returns exceeding 20% during his partnership years, starting with modest capital.
These successes highlight two critical truths:
1. Early-stage value investors often achieve extraordinary returns because they exploit inefficiencies in overlooked markets, no regulations, no liquidity problems etc, can buy smaller businesses.
2. Their strategies rely not on computational power or massive datasets but on deep understanding, discipline, and adherence to fundamental principles.
Some argue that stock picking is “hard,” implying that it’s futile for individuals to attempt it. But claiming something is difficult is not an argument against pursuing it. By analogy, becoming a professional athlete or mastering any skill requires dedication, practice, and talent. Does the existence of elite athletes mean amateurs shouldn’t play sports? Of course not. Similarly, the scarcity of great value investors doesn’t invalidate the philosophy—it underscores its challenges and rewards. As Charlie Munger once quipped, “It’s not supposed to be easy. Anyone who finds it easy is stupid.” For those willing to commit fully to understanding businesses, analyzing financials, and exercising patience, the opportunities are abundant.
Let’s now address the credibility of claims surrounding algorithmic trading. It’s particularly ironic to hear someone say, “I’m humble enough to recognize I can’t pick individual stocks—but I’ve developed an algorithm that yields 63% returns.” There are several problems with this assertion:
1. If professionals with superior resources—better data, smarter statisticians, faster execution—haven’t discovered this magical formula, why should we believe a lone individual has stumbled upon it?
2. If such a formula existed, wouldn’t hedge funds and quant shops deploy billions into exploiting it instantly, thereby eliminating the edge?
3. Extraordinary claims require extraordinary evidence. Without transparency or verifiable proof, these boasts resemble marketing hype rather than credible investment strategies.
Finally, for me, value investing isn’t merely a method—it’s a reflection of my values. It aligns with the belief that enduring success comes from patience, humility, and intellectual honesty. While others chase trends or rely on black-box algorithms, I take pride in building wealth through thorough analysis and disciplined decision-making. Yes, it’s challenging, but the potential rewards are immense for those willing to put in the work. As Benjamin Graham taught, “The essence of investment management is the management of risks, not the management of returns.” Value investing embodies this wisdom, offering both financial prosperity and peace of mind.
Value investing stands as a testament to the power of simplicity, rationality, and long-term thinking. Institutional advantages in data and technology often lead them astray from these principles, while private value investors thrive by adhering to them. Historical evidence proves that extraordinary returns are possible for those who dedicate themselves to mastering the craft. And while algorithmic trading may sound impressive, its claims crumble under scrutiny. For those aligned with patience and integrity, value investing remains the most reliable path to lasting success.
My argument against stock picking isn't due to it being hard but because the vast majority of people who attempt it will likely underperform the S&P over a long enough time scale. (Perhaps you will be the exception to the rule).
"It’s particularly ironic to hear someone say, 'I’m humble enough to recognize I can’t pick individual stocks—but I’ve developed an algorithm that yields 63% returns.'"
In my personal experience, it is possible to consistently outperform the market using algorithms but not by picking individual stocks.
In fact, the most successful fund of all time is Renaissance Technologies' Medallion Fund, which has achieved a 66% annualized return over a 30-year period. RenTec specializes in algorithmic trading strategies. https://en.wikipedia.org/wiki/Renaissance_Technologies
Not even Buffett has outperformed RenTec.
2. The sort of scarce opportunities you're referring to that get fully exploited by others are related to arbitrage, but betting on market trends and direction remains a great way to make money. Anybody buying an S&P ETF is also betting on the overall market direction.
To be clear, you're free to believe and do what you will. I fully respect your admiration for value investing, and it seems like you have a very strong passion for it.
There are lots of ways to make money in the markets. As long as a certain way works for you, keep doing it.
For some people, sure picking stocks is dangerous. But there are tons of winners out there too. I’ve been picking stocks for 18 years now. Not all go to plan…those get cut quickly. But the winners carry the portfolio.
It's definitely true that there are a lot of winners. After all, those are the ones that carry the S&P itself. The hard part is consistently picking out the winners (4% of all stocks since 1926). If you can do that year over year without having the losing stocks causing your portfolio to underperform the market, then all the power to you.
Overall, has your portfolio outperformed the S&P over the past 18 years? If so, by how much?
As a point of comparison, since 2007, the S&P is up 294%.
Yes….but I will admit I didn’t achieve the consistent performance without what I call the “red learning years”.
Was wrecked in 2008. Choppy performance until 2016. Good years and bad years. Educated myself a lot past that point and studied the best traders in the game…Mark Minervini, Paul Jones, Tom Houggard, Jason Shapiro are some of my favorites…among many others I studied. I continue to study traders better than me. And I don’t copy them…sometimes I’ll tweak something to my own strategy.
I’ve been beating the S&P 500 since 2019 (and that includes 2022). I’ve shown all the receipts on TikTok. Last year I beat the S&P 500 by 142%.
So have I always outperformed? No. Not at all. I took my learning lashes before becoming consistent. Im also cognizant that I, and those others I mentioned before, are outliers, and is NOT well suited for most people. trading is a hard way to make an easy living. But it’s a hill I’ll die on.
I think where most people fail….when they are on a trading journey…is thinking they have to be profitable everyday. Or that they need to be in the market everyday. Truth is, I’m actually training myself to be out of the market more than I’m in.
Again…I’m an outlier, with my own strategy. It’s not for most people. When I meet random people that ask me my opinion on the market…knowing they don’t have their own developed strategy….I tell them to buy an ETF and come back in 10 years.
My main respectful retort…there are people that do beat the market consistently. Long term investing isn’t the only way to make money.
Great to hear you've outperformed in the past five years. 142% outperformance in 2024 is crazy.
I've personally found it curious that most expert traders don't operate their own hedge funds (other than Paul Tudor Jones, who is a legend). You can make a lot more money charging performance fees than you can selling trading courses.
Livermore made incredible trades in his life, e.g. up 5x and making millions in the span of days, but he also went bankrupt at least three times and committed suicide due to heavy trading debts.
From my vantage point, I would say the hardest part is that after a great trade, it's easy to convince yourself that you're really smart and good at investing. Then you keep thinking you've found a similar investment opportunity, not realizing the world has changed (flawed pattern recognition).
"I’m an outlier, with my own strategy. It’s not for most people. When I meet random people that ask me my opinion on the market…knowing they don’t have their own developed strategy….I tell them to buy an ETF and come back in 10 years."
Totally agree with this, which is why I wrote the post.
I disagree with your point of view but I understand your points
Agree to disagree! 🤝
1. Overfitting
The author touts an algorithmic strategy with absurd returns (63% annualized!) but fails to acknowledge the glaring issue of overfitting. Imagine watching 1,000 basketball shots taken by a player over their career. With enough data slicing, you might find a pattern: every time they made three consecutive shots from the left corner, their next shot from the top of the key had a 70% success rate. This “strategy” only works in hindsight and has no predictive value for future games. Similarly, the author’s algorithmic strategy is overfitted to past market conditions—it looks brilliant on paper but falls apart when faced with real-world unpredictability. Markets aren’t governed by static rules; they’re driven by human behavior, innovation, and macro forces. Relying on contrived patterns is stupid. True investing requires understanding the underlying business, not gambling on statistical artifacts.
2. Bad Businesses vs. Good Ones: Due Diligence Matters
The author uses examples like Peloton, Zoom, and Snap to argue against stock picking, but these failures only highlight bad investments, not flaws in the concept itself. Value investors don’t chase hype; we buy companies with durable competitive advantages, strong financials, and a margin of safety. If you bought Tesla at $800/share or Zoom during its pandemic peak, that’s your fault—not the market’s. Conversely, buying a company like Coca-Cola in the 1980s or Apple in the early 2000s would have generated life-changing wealth. There’s a reason some businesses thrive while others fail— Do your homework, and you’ll avoid losers. Ignoring bad businesses doesn’t invalidate good ones—it highlights the importance of discernment.
3. Retail Investors Have an Edge Over Fund Managers
The claim that professional fund managers underperform the S&P 500 ignores a critical truth: retail investors actually have structural advantages. Institutions face constraints—liquidity needs, benchmark tracking, committee decision-making—that often force suboptimal choices. Meanwhile, small investors can move nimbly, take concentrated positions, and wait patiently for opportunities without answering to shareholders. Moreover, indexing isn’t inherently superior—it simply reflects the average performance of all participants. If everyone indexed, markets would lose their price-discovery function, creating inefficiencies ripe for exploitation by active investors.
4. Study:
The Bessembinder study claims that only 4% of stocks outperform Treasury bills, but this conclusion is meaningless when you consider the reality of business survival. Studies show that 90-95% of companies fail within just a few years, especially young, unprofitable ones with shaky foundations. These are not investments—it’s like counting lottery tickets as "stocks."
What would actually be relevant is to look at profitable companies, businesses that have generated consistent earnings for years—and compare them to Treasury bills, it does not take a genius to make figure out that this study is a plain joke and have very little relevance.
5. Index Funds:
While index funds offer diversification, they also expose you to hundreds of low-quality businesses dragging down overall returns. Why should my portfolio include zombie companies burning cash or firms with no moat? Indexes are weighted by market capitalization, meaning you’re disproportionately exposed to overvalued giants (e.g., tech darlings in 2021 & 2024). By contrast, selective investing lets you avoid such pitfalls and allocate capital toward truly exceptional businesses. Would you rather own 500 mediocre companies or 10 outstanding ones? Quality matters, and indexing dilutes it.
The author paints a doom-and-gloom picture of stock picking, but his argument boils down to ignorance of proper methodology. Bad investments fail because they’re bad, not because markets are insurmountable. Smart investors who focus on fundamentals, patience, and discipline consistently outperform. Don’t let fearmongering scare you away from buying great companies.
1. The key to avoiding the perils of overfitting is understanding the components of your strategy and how they drive returns.
The post breaks down each of the 3 components of the algorithm, what drives the return in each case, and mentions the potential risk for the highest beta portion: https://blog.inverteum.com/i/159464648/triple-accelerator-algo-component-breakdown
If you don't understand the precise mechanics of how each component of your algorithm drives returns and in what conditions and instead believe religiously in the backtest result to be predictive of the future, then overfitting can certainly be a problem.
But when used correctly, backtesting is a feature, not a bug.
"For algo trading, your rules for making trades are written down and tested according to historical conditions to see how it would have performed.
With stock picking, those rules are in your head. There is no way to backtest your strategy, e.g. companies with low P/E ratios, and see how it would've performed historically."
2. The criteria for successful stock picking--durable competitive advantages, strong financials, and a margin of safety--sound great in theory, but are devilishly hard to define in practice.
The first and third criterion can be highly subjective. Peloton and Zoom, for instance, looked like slam dunks during the pandemic, but turned out to be duds.
When it comes to strong financials, I've written about the pitfalls of a measure like P/E https://blog.inverteum.com/p/the-problem-with-value-investors
Coca-Cola (+268x) is a great example of a company that fits all of these criteria yet still underperformed the S&P 500 (+297x) since 1985. Even if you were patient enough to hold Coca-Cola starting from 1985, you still underperformed the S&P 500, which managed to generate even more life-changing wealth.
As a stock picker, you just don't know how well your heuristics as far as when to buy and sell an investment would've done in the past. You wouldn't know if it underperformed the market.
3. While there are certain aspects where retail investors have an advantage over institutions, it would be deeply naive to assume that professionals and institutions don't have their own massive edge over retail.
Institutions have armies of highly compensated, full-time portfolio managers and analysts and can use machine learning to crunch enormous amounts of historical data and discern patterns in markets.
Some of the so-called disadvantages of institutions, e.g. needing to answer to shareholders, could be advantages when it comes to ensuring good long-term returns and avoiding losses. Without accountability towards outside investors, a retail investor can sit on a losing position forever and lose all their money whereas a professional faces much more pressure to cut losses.
Professionals have far more talent, incentives, and resources than the average retail investor. Just as you wouldn't assume that you're better at basketball or golf than a pro due to the discrepancy in talent, incentives, and resources, it can be dangerous to assume you're better at investing than the pros.
4. Even long-time Buffett investments and profitable consistent earners Coca-Cola (+268x) and American Express (+66x) have underperformed the S&P (+297x) since 1985. There's no question these are great businesses, but over a long enough time scale, it's just hard to beat the index.
5. The "500 mediocre companies vs. 10 outstanding ones" debate is a false dichotomy.
The S&P 500 is more like 30-40 great companies and 450+ average companies. The index is self-rebalancing and momentum-driven, adding to winners and cutting losers. As great companies overperform, their portfolio weight grows larger, while underperformers get quietly removed from the index.
The question when stock picking is whether you can consistently have a higher hit rate and better rebalancing than the index itself over your entire investing career.
I'm humble enough to recognize that I can't consistently pick out the great companies from the mediocre ones. Keep in mind that both Coca-Cola and American Express were mediocre companies compared to the S&P. That's why my belief is that the vast majority of investors would better off not trying to pick individual stocks.
It’s ironic how proponents of algorithmic trading argue that institutions have an inherent advantage over retail investors due to their access to more analysts, machine learning tools, advanced statistics, faster trade execution, and vast datasets—yet simultaneously claim that algorithmic trading outperforms value investing.
Value investing is fundamentally about simplicity and rationality. If your investment thesis can’t be explained to a 12-year-old with a pen and a napkin, it’s too complex. “Investing is simple, but not easy.” The essence of value investing lies in identifying businesses trading below their intrinsic value, understanding them deeply, and holding them patiently until the market recognizes their worth. This approach doesn’t require excessive data, high-frequency trading, or cutting-edge algorithms—it demands discipline, patience, and intellectual honesty. Yet, many institutions prioritize speed, complexity, and short-term results over these timeless principles. Their focus on quarterly performance metrics directly undermines the patient, contrarian mindset required for successful value investing.
Now let’s turn to historical evidence. Private value investors consistently outperform institutional managers, especially in the early stages of their careers when they operate with smaller pools of capital. Consider the following examples:
- Allan Mecham, who began his partnership at just 22, achieved 40% annual returns in his early years.
- Nemcam, a private investor, averaged 45% returns annually over a decade—a feat unmatched by most institutional funds.
- Warren Buffett, himself generated compound annual returns exceeding 20% during his partnership years, starting with modest capital.
These successes highlight two critical truths:
1. Early-stage value investors often achieve extraordinary returns because they exploit inefficiencies in overlooked markets, no regulations, no liquidity problems etc, can buy smaller businesses.
2. Their strategies rely not on computational power or massive datasets but on deep understanding, discipline, and adherence to fundamental principles.
Some argue that stock picking is “hard,” implying that it’s futile for individuals to attempt it. But claiming something is difficult is not an argument against pursuing it. By analogy, becoming a professional athlete or mastering any skill requires dedication, practice, and talent. Does the existence of elite athletes mean amateurs shouldn’t play sports? Of course not. Similarly, the scarcity of great value investors doesn’t invalidate the philosophy—it underscores its challenges and rewards. As Charlie Munger once quipped, “It’s not supposed to be easy. Anyone who finds it easy is stupid.” For those willing to commit fully to understanding businesses, analyzing financials, and exercising patience, the opportunities are abundant.
Let’s now address the credibility of claims surrounding algorithmic trading. It’s particularly ironic to hear someone say, “I’m humble enough to recognize I can’t pick individual stocks—but I’ve developed an algorithm that yields 63% returns.” There are several problems with this assertion:
1. If professionals with superior resources—better data, smarter statisticians, faster execution—haven’t discovered this magical formula, why should we believe a lone individual has stumbled upon it?
2. If such a formula existed, wouldn’t hedge funds and quant shops deploy billions into exploiting it instantly, thereby eliminating the edge?
3. Extraordinary claims require extraordinary evidence. Without transparency or verifiable proof, these boasts resemble marketing hype rather than credible investment strategies.
Finally, for me, value investing isn’t merely a method—it’s a reflection of my values. It aligns with the belief that enduring success comes from patience, humility, and intellectual honesty. While others chase trends or rely on black-box algorithms, I take pride in building wealth through thorough analysis and disciplined decision-making. Yes, it’s challenging, but the potential rewards are immense for those willing to put in the work. As Benjamin Graham taught, “The essence of investment management is the management of risks, not the management of returns.” Value investing embodies this wisdom, offering both financial prosperity and peace of mind.
Value investing stands as a testament to the power of simplicity, rationality, and long-term thinking. Institutional advantages in data and technology often lead them astray from these principles, while private value investors thrive by adhering to them. Historical evidence proves that extraordinary returns are possible for those who dedicate themselves to mastering the craft. And while algorithmic trading may sound impressive, its claims crumble under scrutiny. For those aligned with patience and integrity, value investing remains the most reliable path to lasting success.
My argument against stock picking isn't due to it being hard but because the vast majority of people who attempt it will likely underperform the S&P over a long enough time scale. (Perhaps you will be the exception to the rule).
"It’s particularly ironic to hear someone say, 'I’m humble enough to recognize I can’t pick individual stocks—but I’ve developed an algorithm that yields 63% returns.'"
In my personal experience, it is possible to consistently outperform the market using algorithms but not by picking individual stocks.
1. Professionals definitely use algorithms, e.g. Citadel, BlueCrest, Renaissance, Point72. These hedge fund managers earn billions of dollars a year, in part from deploying algorithms to trade for them. https://blog.inverteum.com/p/why-hedge-fund-managers-make-so-much-money
In fact, the most successful fund of all time is Renaissance Technologies' Medallion Fund, which has achieved a 66% annualized return over a 30-year period. RenTec specializes in algorithmic trading strategies. https://en.wikipedia.org/wiki/Renaissance_Technologies
Not even Buffett has outperformed RenTec.
2. The sort of scarce opportunities you're referring to that get fully exploited by others are related to arbitrage, but betting on market trends and direction remains a great way to make money. Anybody buying an S&P ETF is also betting on the overall market direction.
To be clear, you're free to believe and do what you will. I fully respect your admiration for value investing, and it seems like you have a very strong passion for it.
There are lots of ways to make money in the markets. As long as a certain way works for you, keep doing it.
For some people, sure picking stocks is dangerous. But there are tons of winners out there too. I’ve been picking stocks for 18 years now. Not all go to plan…those get cut quickly. But the winners carry the portfolio.
It's definitely true that there are a lot of winners. After all, those are the ones that carry the S&P itself. The hard part is consistently picking out the winners (4% of all stocks since 1926). If you can do that year over year without having the losing stocks causing your portfolio to underperform the market, then all the power to you.
Overall, has your portfolio outperformed the S&P over the past 18 years? If so, by how much?
As a point of comparison, since 2007, the S&P is up 294%.
Yes….but I will admit I didn’t achieve the consistent performance without what I call the “red learning years”.
Was wrecked in 2008. Choppy performance until 2016. Good years and bad years. Educated myself a lot past that point and studied the best traders in the game…Mark Minervini, Paul Jones, Tom Houggard, Jason Shapiro are some of my favorites…among many others I studied. I continue to study traders better than me. And I don’t copy them…sometimes I’ll tweak something to my own strategy.
I’ve been beating the S&P 500 since 2019 (and that includes 2022). I’ve shown all the receipts on TikTok. Last year I beat the S&P 500 by 142%.
So have I always outperformed? No. Not at all. I took my learning lashes before becoming consistent. Im also cognizant that I, and those others I mentioned before, are outliers, and is NOT well suited for most people. trading is a hard way to make an easy living. But it’s a hill I’ll die on.
I think where most people fail….when they are on a trading journey…is thinking they have to be profitable everyday. Or that they need to be in the market everyday. Truth is, I’m actually training myself to be out of the market more than I’m in.
Again…I’m an outlier, with my own strategy. It’s not for most people. When I meet random people that ask me my opinion on the market…knowing they don’t have their own developed strategy….I tell them to buy an ETF and come back in 10 years.
My main respectful retort…there are people that do beat the market consistently. Long term investing isn’t the only way to make money.
Great to hear you've outperformed in the past five years. 142% outperformance in 2024 is crazy.
I've personally found it curious that most expert traders don't operate their own hedge funds (other than Paul Tudor Jones, who is a legend). You can make a lot more money charging performance fees than you can selling trading courses.
Managing a fund isn't just about maximizing returns but delivering consistent returns with limited permanent loss of capital: https://blog.inverteum.com/p/why-hedge-fund-managers-make-so-much-money
It's the downside aspect that can hinder great traders. One of the most famous cautionary tales is Jesse Livermore: https://en.wikipedia.org/wiki/Jesse_Livermore
Livermore made incredible trades in his life, e.g. up 5x and making millions in the span of days, but he also went bankrupt at least three times and committed suicide due to heavy trading debts.
From my vantage point, I would say the hardest part is that after a great trade, it's easy to convince yourself that you're really smart and good at investing. Then you keep thinking you've found a similar investment opportunity, not realizing the world has changed (flawed pattern recognition).
Jack Raines talked about this with the investors who shorted the housing bubble in 2008: https://www.youngmoney.co/p/one-trick-ponies
"I’m an outlier, with my own strategy. It’s not for most people. When I meet random people that ask me my opinion on the market…knowing they don’t have their own developed strategy….I tell them to buy an ETF and come back in 10 years."
Totally agree with this, which is why I wrote the post.
Yep. Can’t argue with any of that.
I’ve been asked about managing a fund. Think my answer mirrors many others: simply don’t want to, and don’t want the responsibility.
I can take a multi month break from the markets (and content) when I want to. Took most of 2024 off actually. Just don’t want to work at all times.
Great conversation, appreciate the thoughtful responses. I’ll follow.
Nice to talk as well. Subscribed.
So mind explaining how Buffett win by a wide margin over decades if pincking individual stock is useless?
He's Buffett, the exception that proves the rule.
The point this post is trying to get across is that what works for Buffett probably won't work for most investors.
More about the mistakes value investors make: https://blog.inverteum.com/p/the-problem-with-value-investors
Invest in quality companies and hold them for years. Unlike most who only hold for 10 months.
"Quality" in this context is highly subjective and dependent on the discernment of the beholder.
Holding through sharp drawdowns can also test the resolve of even the most patient investors.
Maybe once upon a time, but indexes have become risky as well. And using an ETF is more riskier as they can be shorted very easily.
There is no risk-free asset in this world. All assets, even Treasury bonds, have some form of risk.
For my portfolio, I'm more willing to accept the risk profile of index ETFs than individual stocks.
Ease of shorting is a plus for me because markets will inevitably have bear markets. https://blog.inverteum.com/p/professional-investment-strategies-need-short-component
I never said there were no risk free assets in this world.
Not all ETF’s own the underlying securities in the sector or index that they are supposed to replicate as well. I’ll just leave it there.
You're talking about leveraged or inverse ETFs that use derivatives?
Cool