The Stock Market Is Too Easy – This Should Concern You

With markets approaching the one-year anniversary of their pre-Covid-highs, it might seem surprising that the MSCI All Countries World index, the benchmark most used by global funds, is hitting new all-time highs.


Thanks to unprecedented monetary and fiscal stimulus by the world’s central banks, markets have recovered sharply from last year’s depths of despair even though unemployment is high, inflation is making a comeback and earnings for a large part of the economy have been wiped out. (To read more on why the markets are at a record high, read my post on the subject here).

In this market everyone seems to be making money. That market appears to be in risk off mode with mantra ‘stocks only go up’ being chanted from the rooftops. Everyone from celebrities to tik tok influencers to the average joe have been partaking in this rally. Trading platforms have seen a surge in demand so much so that some like Trading212 have taken to creating waiting lists. Luckily, they are other platforms  which are still onboarding new clients. For those looking for a commission free stock dealing service such as Trading212, Freetrade is a good alternative.


Whilst it should be pointed out that it is a good thing people are taking a keen interest in the stock market, I just hope people are investing for the right reasons. I hope they are anchoring there returns for 8% a year. Not the 100% returns a day as we saw in Gamestop, AMC and Nokia shares. Nor the high returns we are currently seeing in bitcoin related stocks such as Argo blockchain.


In this environment it is easy to fall prey to delusions of grandeur and overconfidence. Twitter is presently awash with displays of hubris and boasting of abnormally high returns. Here is one example — “If you haven’t made 100% or more in market this year, you’re either a horrible trader or you’re not trading at all.” As I’m about to explain, these sort of returns are not sustainable and a dose of realism and modesty is warranted before thinking about opening a trading account.


In a market such as that of today, it is easy to think you are the next Warren Buffet. You can do no wrong. Everything you buy goes up. Everything you touch turns to gold. You seem to have the Midas touch. I hate to be that guy but it shouldn’t be this way.


Larry E Swedroe, chief research officer at financial advisory firm Buckingham Wealth Partners, wrote a fascinating book called ‘The Quest for Alpha’. It details his search for the holy grail of consistent market outperformance, beyond what can be normally expected by chance. He examines the evidence from numerous academic studies on mutual funds, hedge funds, pension plans, private equity, venture capital and individual investors. His verdict: that consistent market outperformance is just a myth.


Its times like this when even I’m lured into thinking that I can earn high double digit returns consistently. However it’s worth remembering why this is so hard to do — imagine the stock market to be a giant supercomputer, incorporating the opinions of all investors around the world. Therefore all known information is already reflected in today’s prices, and to express a view that a particular stock is under priced or overvalued means to say that you possess more insight than the collective wisdom of the entire market.


That is extremely hard to do. It’s unlikely that you’ll be right, and even if you are, you have to keep making correct calls to consistently outperform the market, an unlikely outcome. You are going up against the best minds in the universe with unlimited pools of money and the best technology (super computers), you luck will eventually run out. Short term trading is ultimately a losers game.


It is a paradox of modern financial markets that the average investor is more intelligent and has more information at their fingertips than someone 20-30 years ago, but the markets’ collective short-termism and irrationality is increasing. Go figure.

That is why I say, The Only Way For Individual Investors To Outperform Is To Increase Time Horizons. Don’t be tempted by short term outperformance.  Instead, focus on business fundamentals. Buy Good quality businesses. Hold for the long-term. And taper your expectations. 

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