Yet the chip stocks have been flat for 2 weeks, such as Marvel and Nvidia. But QQQ and others still surging. It's not just an AI boom, but a risk-on tech boom. However, crypto not participating, but keeps falling.
This is why it's so hard to beat the market and why conventional wisdom keep failing: people were expecting high inflation to hurt stocks, or expecting rate hikes to hurt stocks, or bought meme stocks which crashed and burned, or bought crypto instead of stocks. Staying invested in index funds regardless of what the macro situation is tends to produce the best outcome.
Or, it is a viable strategy because enough people are doing it. We’ve seen this with ESG funds for instance. More investors want to invest in ESG funds, because bigger firms decided to. That makes ESG funds go up, and those investors then look like geniuses. Similarly, when a huge portion of the population market buys the S&P 500 every single week, how can it not go up?
Passive investing is good because it's not a strategy you can get crowded out from. As long as the world economy grows, of course - if there's nothing to invest in then you shouldn't invest.
However there are two better strategies than index funds. They are 1. get married and 2. buy a house.
It's hard to beat the market, because people have way too short horizon. Take your example here - it's absolutely meaningless what's up or down or flat over a 2 weeks period...
The reality in the stock market is, that you can make money investing long term (let's say >5 years horizon) in good or great companies, running well a very short term strategy (market making, hft, arbitrage), but usually you cannot do any money when your horizon is somewhere in between. And the issue is, for most people, that's the case....
If you buy/sell a lot then there are also fees, both to brokers and I guess implied fees to market makers. So there are more than 2 parties involved (buyer and seller), and so more than 50% can lose.
There are plenty of no-fee brokerages and market makers arguably narrow the spread.
But it doesn't really matter if the percent who lose on net is 50% or 51% if you're at the 75th percentile. And a large plurality of people are. You don't have to be in the top 0.1% to come out ahead.
The reason for the usual advice is that 50% of people are below average. And then they get mad when the market proves it to them, so the advice that keeps them satisfied is to buy an index fund.
The statistics would be interesting. While 50% of trades are below average, that might translate to a different percentage of trading entities. (like 5 drunk idiots and one sober professional playing poker in a casino)
A fool and his money are soon parted. There may be people who show up to the casino drunk, and that can enrich quite a number of other patrons, but then they go home bankrupt and have nothing to play with tomorrow. The steady-state number of drunk idiots is bound to be small because they're self-eliminating.
Some of the people who try to beat the market do actually lose their money. You can go play games with options trading or short selling or high volatility stocks and not just get 1% instead of 7%, you can lose the majority of your principle. Or all of it. Or even end up in debt.
Not a huge difference here. But it is lower. The difference really shows up when you start seeing losses. The extreme case of one year with 100% loss demonstrates things.
Do you have any reason to believe that to be true? It could just as easily be the other way. One big fat idiot can lose all their money to a large number of people who then each beat the market by a small margin.
I think it's pretty common knowledge that most funds and stock pickers underperform the benchmarks. I think for retail investors the ballpark figure is like 90% underperformers.
Warren Buffett took a bet in 2008 that over the next 10 years, a low cost S&P 500 index fund will outperform active hedge funds - and it did.
Fund managers are a different kind of thing, because it's a principal-agent problem. The fund manager has different incentives than the client. He wants to get a bonus, so he takes risks consistent with the structure of his bonus contract even if they're not aligned with the interests of the investor. It's not surprising that underperforms, it's a textbook perverse incentive.
But people often get ahead by understanding an industry. For example, when Stable Diffusion became available last year, someone who was paying attention might have noticed that it was likely to become popular and spike demand for GPUs to run it on. If that person went out and bought some shares of NVDA or AMD at that point, they'd be happy with where it is today compared to an index fund.
But a major index fund is unlikely to temporarily change the ratio of those companies in the index in response to that kind of information, so the higher returns are only available to people who are paying attention and willing to take the risk with their own money.
I completely agree that it is possible to beat the market - it's just that it's very difficult, mostly due to misaligned time horizons.
Take your insight here about NVidia - it's false. So far, GPUs sales DID NOT increase, at least not significantly. Go check NVidia sales for past 4 quarters. They said they expect them to increase significantly in the next quarter. Even if it does, and even if it doubles what they say, the valuation of the company is still in the bubble territory.
Another great example is Tesla - stock surged on anouncement that GM will use their chargers. When you look at the numbers, they will make an insignificant money on that (optimistic scenarios are between 3-10 billion $, by 2030 !) - yet the stock added more capitalization than ... the entire captialization of GM !
Now, if you say that NVidia has a huge business moat that is untouchable for the next 5 years - that's a different story.
> Take your insight here about NVidia - it's false.
That seems inconsistent with:
> They said they expect them to increase significantly in the next quarter.
The beating the market thing is the thing where you figure it out before other people and buy before the price goes up. Or figure out what people will think will be the case in the future.
Even if their sales don't go up at all, because large numbers of people now expect them to, someone who came to that conclusion earlier and bought the stock last year will have beat the market between then and now.
> Even if it does, and even if it doubles what they say, the valuation of the company is still in the bubble territory.
Tech valuations always include the potential for growth. When you make a lot of money and have a hot product to leverage into dominance in other market segments, you have more growth potential.
Microsoft now makes more revenue from Azure than Windows. But the reason for that is Windows. They can give you a VM with Windows without paying anyone else for a license, which is a competitive advantage that gets them a huge chunk of a market which is bigger than Windows itself.
That is never guaranteed, but the potential for it increases valuations. Then sometimes they crash. But sometimes they go up more, because the potential actually pans out.
> Another great example is Tesla - stock surged on anouncement that GM will use their chargers. When you look at the numbers, they will make an insignificant money on that (optimistic scenarios are between 3-10 billion $, by 2030 !)
Because it's not about making money on chargers. If more companies use their charging standards, more places will install their chargers because there will be more customers with cars that can use them. With more chargers, more people will find it viable to buy an electric car. Then they sell more cars.
And it's the same kind of thing. The valuation includes the potential for growth. Now Tesla is selling a lot of cars, which they're making batteries for, so they're gaining expertise in making cost-effective batteries. If the batteries get cheap enough, they won't just be selling them in cars, it will make Powerwalls and grid storage cost-effective, and that's a big potential market.
There is no guarantee this happens, but the potential for it increases their valuation.
Again, the numbers don't add up. It's an illusion - you can project this kind of growth for small companies, not for huge companies. Maybe if aliens come down to earth to buy some GPUs next year.
Same for Tesla - for those projections to be true, they would need to be making more cars than any other car maker, and soon. It's not even close to happening. I'm not saying that to diminish their achievements - which are truly unbelievable ! But their valuation reflects almost impossible things.
Fun fact for Tesla - Tesla is mostly buying batteries for their cars from other battery makers, not making them ! Tesla is very deceptive about what they do, and what they don't. Knowing that they are a just buying batteries and not making them, change your opinion about batteries making profit potential for Tesla ?
> It's an illusion - you can project this kind of growth for small companies, not for huge companies
Google's revenue is at more than 500% of what it was a decade ago. Amazon 800%.
> Knowing that they are a just buying batteries and not making them, change your opinion about batteries making profit potential for Tesla ?
It's their purchasing capacity that matters because it's what justifies the amount it makes sense for them to spend on R&D (and provides the revenue they have to do it with). The factories that produce more cost-effective future batteries can't have been built yet anyway if the technology is still under development.
I'm sorry but how this second answer relates to my question ?
You said that selling a lot of cars is good since they gain experience in making cost-effective batteries, and hence can sell other profitable things - not only cars.
I just pointed to you that it's not Tesla which is doing it - it's other companies ! Yet, somehow, you seem to ignore that little detail :)
This is why it's so hard to beat the market and why conventional wisdom keep failing: people were expecting high inflation to hurt stocks, or expecting rate hikes to hurt stocks, or bought meme stocks which crashed and burned, or bought crypto instead of stocks. Staying invested in index funds regardless of what the macro situation is tends to produce the best outcome.