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reasons that individual investors can beat the market, and beat the pros



September 20, 2009 – Comments (48)

I often find people expressing shock when I tell them that I manage my own money.  I am occasionally lectured about how stupid that is, and I am occasionally chastised by people for being so reckless. 

After selling a business last fall my former biz partner and I were called, visited, emailed, and sometimes even stalked by no small number of hedge funds and banks and investment managers and more.  The attornies that helped us with the sale process went so far as to tell the investment guys we eventually selected that in exchange for referring us to them, the money guys had to swear to not allow us to manage our own money or put it all in stocks.  Thats not a joke.

The hedgies more than once told us that we couldn't possibly figure out the compexities of the modern market.  One very prominent hedgie (posts on the web, often on CNBC, you'd probably all know his name) went so far as to yell at my biz partner and I about how stupid we were for managing our own money and that it was not a question of if we'd lose it all, just a question of when.  He was rude to an extent that bordered on the comical.

Others taunted us as the market fell.  They'd call in late february and say, mockingly, "so, checklist, the markets been down, how are your investments doing?  we're short the market so we're slightly up".  That outfit was short REITs and Casinos and Banks right up to mid-march.  I wonder how that ended for them?  Oh, wait, i talked to them a while ago, they were up 5% on the year.  Atta boys, sucks getting caught in the worlds biggest short squeeze.

The common sales pitch with these investment pros is that a little old nobody like me can't possibly grasp it all.  Yes I ddi well in business, but this is something different, this is what we do, this is what we work on.  You, checklist, are good at ABC, we are good at investing.  

But the thing is this:  all the hedgies we talked to were short the sotcks most out of favor.  Casinos, REITs, banks, insurance.  They were long stocks like Monsanto and Wal Mart and stuff.  They were, basically, exactly following popular opinion at the time.  

All the more mundane funds were long the same crap.  Google, Apple, Wal Mart, McDs, Exxon, Amazon, etc etc etc.  They were long big cap names, probably because their funds are just too freaking big to really take a big position in, say, ASH when ASH's market cap was only 500 mil.  

I'd read Dreman, he talked about the profitability of going against the crowd.  I read somewhere on the internet that small caps outperform over time, and this is particularily true coming out of a bear market.  

But anyway, after alot of thought here are a host of reasons why anybody can beat the pros:


1.  you can buy small cap stocks, you can buy microcap stocks, and you can buy nano cap stocks.  you can buy 10's of thousands of shares of BZ when its market cap is less than 50 million.   Big funds can't move money into nano cap stocks at all, no significant amount of money at all.

2.  you can buy stocks under $5 or even under $1.  A huge amount of the money i've made has been buying shares of companies under $5.  GNW, CNO, BZ, XL, ACAS, MCGC, ALD, ARCC, AINV, BAC, HIG and more dipped under $5.  Most of those names I only bought under $5, many I bought under $1.  The deepest value plays are often "penny stocks".

3.  you can actually make sense, you don't have to follow the crowd.  "the crwod", by the way, are those pros.  It was them shorting everything silly that got casinos and insurers and everything else so unbelievably low.  Can't short and buy at the same time, can you?  Hence, literally, the pros (en masse) are compelled to follow the crowd because THEY ARE THE CROWD.  Any given pro may go against the grain but this seems to be rare, thats why they call it "the crowd" because it tends to suck everybody in.

4.   You can wait.  They have to perform quarter to quarter, which results in poor decisions, you can wait.  You can hold whatever whenever, you don't ever have to answer to someone why DOW is on your books when its just crashed, you can double down and enjoy the ride up.  You have no stigma for having really out of favor names on the books, making it easier to follow the basic principles outlined by Dreman and rendered wildly obvious by history:  going against the crowd is what makes money

5.   you don't have to listen to analysts.  analyst upgrades drive stock prices higher, bigtime, this is a fundamental reason why stocks move higher.  Peter Lynch once said the reason most money managers perform so poorly is because "nobody ever got fired for losing their clients money on IBM", meaning that if a stock was in favor with documentation to support that and it went down, they aren't likely to be at risk of losing their job.  If they lost money on XL at the bottom...  they could be in hot water.  This gives individuals an ability to be ahead of the curve.  Like ASH for me.  I bought a pile of it early in the year.  In February one analyst upgraded it but nobody cared.  In March another did, it started moving.  Then more and more did.  Now the pro's like it.  NOTHIGN AND I MEAN ABSOLUTLEY NOTHING has changed in ASH's situation, but now its $44 and analysts are still upgrading it.  

all the money is made by being ahead of the curve, or most of it anyway.  


Frankly, I think those 5 reasons are very compelling.  Feel free to add more.

The wildly condescending hedgie that told me I was going to lose all my money, this wasn't a question, this was a fact, all of it (how stupid is that statement, really?) and probably soon...  is up 17% this year.  The markets up what?  15%?  I'm up 17% + 15% + 200% + a decent dividend.  

I didn't get any insider information.  I didn't front-run any stocks, I didn't naked short anything or naked long or write an article anywhere to pump or pound any stocks.  I just played the odds as I understood them.

1.  buying whats most out of favor makes the most money

2.  buying into epic crashes int he market has always paid off in time

3.  bear markets always end, and coming out of them small caps perform the most

4.  buying stocks that crashed the most in bear markets tends to yield superior returns coming out

5.  stocks with cheap valuations outperform.  low price/book, low p/e, low price/cash flow, and more

6.  one should strive to avoid stocks likely to go bankrupt

and I made one really good call (each link is different).  

I just played by history and followed the rules it teaches.  Even without that one really good call the returns would have been epic and far far greater than any of thecocky condescending hedgies that badgered us endlessly earlier in the year. 

I win, they don't, and frnakly I think if you follow the basic rules history so kindly outlines, any of us can beat the market and beat the pros.  

good luck

but, just follow the rules history outlines, and you probably don't need alot of luck


48 Comments – Post Your Own

#1) On September 20, 2009 at 12:39 AM, Momentum21 (97.99) wrote:

way to go took me awhile to come around and I admire your conviction through some tough times.

...but the big question is what next? every system works until it doesn't work...history proves that as well. there is lots that can be made or lost from here forward...

I have noticed that you haven't made a pick in quite some time... 



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#2) On September 20, 2009 at 12:51 AM, checklist34 (98.71) wrote:

momentum, i have run my CAPs portfolio sort of kind of like my real portfolio.  And i'm not buyhing anything in real life right now except nibbling at RJET (its already one of my biggest positions) and UNG options. 

There just isn't anything out there that right now screams at me to buy it.  I would be willing to buy RJET, HTGC, ARCC, NLY, MO, PNNT, PSEC, AINV, FSC becuase of (all but RJET) very high yields and good future prospects.  RJET is going far, far higher than todays prices in the fullness of time in my view.

I also think MCGC is a pretty good buy still at under 1/2 of book and with a good set of debt-negotiations long behind it.  

And I think CNO will live and go far higher (double digits) in the fullness of time.  Book value is 18 bucks or so I think.

hence those picks are open.  I'm holding AA in real life largely unhedged, but I closed it on CAPs for some reason (accident maybe?) and so on.

Basically, stocks aren't that cheap right now and while that doesn't mean the market can't go far higher...  it does mean i'm holding and/or hedging and not buying all that much of anything.


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#3) On September 20, 2009 at 12:51 AM, dragonLZ (86.01) wrote:

checklist, first of all: Congratulations! Congratulations on your success and congratulations on having both smarts and ball$ at the time when many didn't have either one.

I agree with everything you said, especially #4 & #5.

I said a few times already somewhere in my blogs how "smart analysts" start upgrading stocks which are up 1,000% (and reach$20), but they are the same guys who were calling same stocks 'junk" when they were $2 just a few months ago... Funny, really funny (or really sad, depending on which way one looks at it)...

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#4) On September 20, 2009 at 12:58 AM, checklist34 (98.71) wrote:

dragon, thanks much.  analysts are like "the crowd" they are momentum-following too often.  Absolutely nothing has changed at ASH, but all of a sudden they are $43 and everybody loves them...


momentum, i think that the same things work throughout history...  trends come and go, secular bears come and go, secular bulls come and go, but i think that except a few times in history (like the late 90s tech fad) buying cheap stocks wins, going against the crowd wins, and so on.  

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#5) On September 20, 2009 at 1:23 AM, Momentum21 (97.99) wrote:

thanks for your candor...I actually have been watching RJET but haven't picked it up in RL...yet. I believe that you brought that one to by attention...will do some more research...

kind of feeling like I missed the boat with the airlines in general but RJET definitely fits with the best of the beaten down strategy that I have been employing lately.

Long: WNR, AOI, ABR, MWA, SAY and OPCDF...with a little hedge thrown in to soften any blow. 


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#6) On September 20, 2009 at 1:38 AM, throwerw (28.44) wrote:

i was interning at a Merrill Lynch wealth management office in a small city last spring... I should have known it was the perfect time to buy Bank of America (or anything, for that matter) in late February when all the old ladies were calling in asking their advisors to sell their BAC and buy municipal bonds yielding 4 percent. 

I've done far better than the market since then, but not nearly as well as you have, by understanding the same rules as you listed above. I'm only 22, and I'm glad I started learning about investing in this kind of market.  I'll be ready for the next crash, whenever it is.

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#7) On September 20, 2009 at 2:58 AM, CaptBS (98.31) wrote:

This was fun and refreshing to read. I can't tell you how many times I've been told (and am still told) that I, as an individual investor, have little chance of beating the market. This mantra kept my portfolio almost entirely in mutual funds for years, under the reasoning that professionals who make their livelihood researching and following various securities have much better chance of outperforming the market, even after management fees. Historically, my mutual portfolio has outperformed the market by 2-3%, and this year is no exception... but ever since I started hand-picking stocks last year, I've realized that it's very possible to do a lot better. This year, my mutual funds are up about 17%, but my hand-picked stock portfolio is up well over 100% without batting an eyelash. And all I did was side with "the odds" and operate free of the restrictions that you so succinctly summarized here.

One of my buddies who used to work at a [now-defunct] hedge fund is fond of saying, "Everyone's a genius in a bull market." There's some truth to that remark (insert comments about rising tides and high-beta stocks here), but it seems like "playing the odds" and making buy/sell decisions independent of self-perpetuating analyst upgrade/downgrade cycles can also greatly help one weather and outperform a bear market as well. As the Fool likes to point out, every market has its own set of opportunities.

Cheers to the little guy. 

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#8) On September 20, 2009 at 3:25 AM, TMFDiogenes (88.83) wrote:

Awesome post, checklist.

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#9) On September 20, 2009 at 4:42 AM, JakilaTheHun (99.92) wrote:

Great post, Checklist. 

I'm always amused by the people who say that the big guys have all the advantages.  As you point out in #4, it's simply not true.  Most of the big money managers are cowards at heart and just follow the crowd because it's safer and when they're wrong ... "it surprised everyone!  No one could've ever anticipated something like this!"

I only started investing in 2008.  I grew up poor as dirt and just scrapped by most of my life.  It wasn't until I got my Master's degree in '08 that I actually had employment where I made enough money to invest substantially.  It took me a few months to understand things, but about October and November, I started understanding valuation very well and I've probably made about a 120%+ return since that time.  I was very bullish on mining stocks and Micron (MU) in November/December and became very bullish on REITs March thru June (I'm still bullish on a lot of REITs).  

Meanwhile, I saw a bunch of "pros" out there who were short on banks, REITs, and anything else beaten down.  The major analysts started upgrading most of the stuff I was bullish on about 4-6 months after they had already taken off.  One of the big examples was Discover (DFS) - I noticed it around $6 and thought it looked like an incredible bargain.  Everyone told me I was nuts --- now it's at $16.  Naturally, the analysts upgraded it around $14 - $15, after already missing most of the upside.  At this point, given the risks, it's probably close to fairly valued.  This seems to be a consistent pattern with the analysts.  

Unfortunately, my company decided to lay off my entire sub-group a few months ago, so I'm unemployed right now, but I've got a substantially larger buffer than I would have otherwise due to my investing over the past 10 months.  


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#10) On September 20, 2009 at 5:04 AM, uclayoda87 (28.70) wrote:


What motivated me last year was seeing what was about to happen, write about it and then do nothing.  After losing 40% of the value of my holdings in a "well managed diversified portforio", I took it over and began actively investing.  Losing this much meant that I would not be able to retire in the next 5 years, so since I have to work anyway, I might as well see if I could do better than the money managers.  Currently I'm up 15% over where I was last year at this time.  My blog detailed the bets that I made:  FCX at $17, PDS at $2.20, AAPL, CNQ, miners, energy, GLD, CEF,  and most recently WNR.

I suspect that most of the easy money has been made, but I believe that the FEDS optimism and Cramer's -BuyBuyBuy will guarantee a significant market correction in the near term (October).  Now I'm looking at what stocks I'd like to own, but at a lower price.  My short list includes:  WNR, VMW, PANL, and SCI.

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#11) On September 20, 2009 at 7:07 AM, translator999 (99.92) wrote:

A truly excellent post, checklist34!

+10 recs if I could! Should be required reading for the investing masses here at TMF.

Congratulations on NOT listening to the know-nothings of this world whose only goal is to separate you from your hard-earned money.

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#12) On September 20, 2009 at 8:56 AM, portefeuille (98.78) wrote:

Not all hedge fund managers are bad. Some are extremely good, like Seth Klarman and James Simons.


Mr. Klarman’s record has generated intense loyalty from investors. Since he began Baupost in 1983, it has posted an average annual total return of 19.55 percent, according to data provided by the hedge fund group. Declines have been posted in only 11 of the total 97 quarters since Baupost’s debut.


(from here)



James Harris Simons
From Wikipedia, the free encyclopedia
James Harris "Jim" Simons (born 1938) is an American mathematician, academic, trader, and philanthropist.
In 1982, Simons founded Renaissance Technologies Corporation, a private investment firm based in New York with over $20 billion under management; Simons is still at the helm, as CEO, of what is now one of the world's most successful hedge funds.[1] Simons earned an estimated $2.5 billion in 2008[1], $2.8 billion in 2007[2], $1.7 billion in 2006,[2] $1.5 billion in 2005,[3] (the largest compensation among hedge fund managers that year[4]) and $670 million in 2004. With an estimated current net worth of around $5.5 billion[5], he is ranked by Forbes as the 55th-richest person in America.[6] He was named by the Financial Times in 2006 as the world's "smartest" billionaire.[7]
Simons lives with his wife in Manhattan and Long Island, and is the father of three.
Simons shuns the limelight and rarely gives interviews, citing Benjamin the Donkey in Animal Farm for explanation: "God gave me a tail to keep off the flies. But I'd rather have had no tail and no flies."[8]
Early life and career
Born into a Jewish family,[3] Jim Simons is the grandson of a shoe factory owner in Massachusetts,[9] and received his bachelor's degree in mathematics from the Massachusetts Institute of Technology in 1958,[4] and his PhD, also in mathematics, from the University of California at Berkeley in 1961[10] at the age of 23. Between 1964 and 1968, he was on the research staff of the Communications Research Division of the Institute for Defense Analyses (IDA). Simons taught mathematics at the Massachusetts Institute of Technology and Harvard University. In 1968, he was appointed chairman of the math department at Stony Brook University.
In 1976, Simons won the American Mathematical Society's Oswald Veblen Prize in Geometry, for work that involved a recasting of the subject of area minimizing multi-dimensional surfaces and characteristic forms. This resulted in his proof of the Bernstein conjecture up to real dimension 8, and an improvement of a certain "regularity" result of Wendell H. Fleming on a generalized Plateau's problem.
Simons' most influential research involved the discovery and application of certain geometric measurements, and resulted in the Chern-Simons form (aka Chern-Simons invariants, or Chern-Simons theory). In 1974, his theory was published in Characteristic Forms and Geometric Invariants, co-authored with the differential geometer Shiing-Shen Chern. The theory has wide use in theoretical physics, particularly string theory.
In 1978, he left academia to run an investment fund that traded in commodities and financial instruments on a discretionary basis.
Renaissance Technologies
For over two decades, Simons' Renaissance Technologies' hedge funds, which trade in markets around the world, have employed complex mathematical models to analyze and execute trades—many of them automated. Renaissance uses computer-based models to predict price changes in easily-traded financial instruments. These models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions.
Renaissance employs many specialists with non-financial backgrounds, including mathematicians, physicists and statisticians. The firm's latest fund, the Renaissance Institutional Equities Fund (RIEF),[11] is designed to handle upwards of $100 billion. RIEF has historically trailed the firm's more well-known Medallion fund, a separate fund that only contains the personal money of the firm's executives [12]
"It's startling to see such a highly successful mathematician achieve success in another field," says Edward Witten, professor of physics at the Institute for Advanced Study in Princeton, N.J., and considered by many of his peers to be the most accomplished theoretical physicist alive... (Gregory Zuckerman, "Heard on the Street, Wall Street Journal, July 1, 2005).
In 2006 Simons was named Financial Engineer of the Year by the International Association of Financial Engineers. In 2007 he was estimated to have personally earned $1.7bn.[13]
In a statement released to shareholders, the fund announced it had sustained losses of up to 7% in the wake of the 2007 Subprime mortgage financial crisis but managed to end the month of August with a positive performance of +0.7%
The wealth that Simons has amassed funds his many philanthropic pursuits. Simons is a benefactor for the mathematical sciences, supporting research projects, chairs, and conferences in the United States and abroad.
Simons and his second wife, Marilyn Hawrys Simons, co-founded the Paul Simons Foundation, a charitable organization which supports projects related to education and health, in addition to scientific research. In memory of his son Paul, who he had with his first wife, Barbara Simons, he established Avalon Park, a 130-acre (0.53 km2) nature preserve in Stony Brook. In 1996, 34-year-old Paul was killed by a car while riding a bicycle near the Simons home. Son Nick drowned at age 23 while on a trip to Bali in Indonesia in 2003 .[9] Nick had worked in Nepal and the Simonses have become large donors to Nepalese healthcare through the Nick Simons Institute.[14][15] Jim Simons also founded Math for America, a non-profit organization with the mission to significantly improve math education in public schools.
In early 2006, he led a group of directors of Renaissance Technologies Corporation and of Brookhaven Science Associates in donating $13 million to fund a budget shortfall of the Brookhaven National Laboratory that would have shut down the operations of the Relativistic Heavy Ion Collider for 2006.
Also in 2006 Simons donated $25 million to Stony Brook University through the Stony Brook Foundation.[16][17] The gift is intended to benefit the Mathematics and Physics departments at the university.
On February 27, 2008, then Gov. Eliot Spitzer announced a $60 million donation by the Simons Foundation to found the Simons Center for Geometry and Physics at Stony Brook, the largest gift to a public university in New York state history.[18]
Autism research
The family's charitable foundation has committed $38 million to find the causes related to autism in recent years, and plans to spend another $100 million in what is becoming the largest private investment in the field of autism research, while Simons personally exerts extraordinary control over where and how his money is spent. Simons has provided DNA from his family for study, and has given assistance in helping solve research problems. When MIT asked for brain research funding, he stipulated that the project focus on autism and include scientists of his choosing.
On June 11, 2003, the Simons Foundation hosted its first "Panel on Autism Research" in New York City, a day-long event highlighting research into the causes of autism, the accurate genomic mapping of autism, and in the study of the biochemical mechanisms that occur in people with autism. Attendees included David Amaral, Dr. Eric Courchesne, Dr. Nathaniel Heinz, Tom Insel, MD, Catherine Lord, PhD, Dr. Fred Volkmar and Dr. Paul Greengard. The Simons Foundation recently gave $10 million to two researchers at the Yale University Child Study Center to study genetic influences on autism.


(from here)

Also have a look at this post.

A great talk by Klarman is here.

Also, as he suggests, have a look at the Tweedy, Browne research site and this article from there: What Has Worked in Investing (pdf).


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#13) On September 20, 2009 at 8:59 AM, portefeuille (98.78) wrote:

Congratulations on NOT listening to the know-nothings of this world whose only goal is to separate you from your hard-earned money.

The good hedge fund managers are usually the exact opposite of "know-nothings".

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#14) On September 20, 2009 at 9:01 AM, portefeuille (98.78) wrote:

"It's startling to see such a highly successful mathematician achieve success in another field," says Edward Witten, professor of physics at the Institute for Advanced Study in Princeton, N.J., and considered by many of his peers to be the most accomplished theoretical physicist alive...

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#15) On September 20, 2009 at 10:32 AM, portefeuille (98.78) wrote:

good post, of course.

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#16) On September 20, 2009 at 12:02 PM, dwot (29.20) wrote:

Nice job.  I tripled my money in about 15 months but then I left the markets and I have not gotten back in.  I could still do well, but the down side risks just did not seem worth it.  I was under employed when I was going crazy in the market, and now my plate is quite full so I don't see me being in this market unless I could watch very closely, very, very closely.

But, you are right about the being treated like you can't do it.  I ran into that problem big time with my husband and my mother-in-law and 2 to 1, well, I gave in and we lost big time.  I gave in because I did poor analysis.  I never imagined we could lose 40%, I just did not believe the claim that we'd be making 8-10% and did my analysis that found the break even for what I wanted to do was about 4% and I did not imagine the markets would do much worse then that, hence, also part of the reason I am out now.  In the end it did work out better because that cash that had been put aside for investing was what I was able to use to triple because I was managing it, not listening to moron investment advisors.

And, omg, I had a friend that raved about his advisor.  He'd tripled in about 5 years and I went to see his advisor, who told me point blank that he though I would need a lot more help with my investments then my friend who had recommended him.  The interview went, "well, Darcy thought that this would be a good investments and Darcy thought that this would..."  My friend failed to see his portfolio was all about him making his own investments.  And this guy said he was conservative and he'd get me into banks and blue chips.  We all know what happened to banks and blue chips...  I left that meeting and I thought, "what a moron.  He is so completely average and built his career on being in the right place at the right time, when timing made up for how grossly inadequate you truly are."

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#17) On September 20, 2009 at 12:39 PM, anticitrade (98.68) wrote:

Great post!  Parallels a lot of things I occasionally rant about. 

I like your list, but I will try to add a few things:

1)  We are nimble.  I dont have to justify my decisions to anyone so I can jump in and out exactly when I want without running the decision by anyone else.

2)  Since we are hobby investors the cost of our research time is free.  Which means we can spend hours researching a company, decide its not worth it, and there is no pressure to convert wasted company resources into a poor decision.  (Although we may choose to act on our own wasted resources anyay)

3)  We are not blinded by the "ivory tower" the investing industry has created for itself.  Some of us, certainly not all, can easily admit we are wrong and change our strategy.  If you are a professional, you must argue that you are right and the world around you is wrong. 

4)  We dont have to "sell" our investing strategy or portfolio to others.  At some level any fund must consider the customer who will potentially buy into it.  Consequently they must format their startegy to be appealing to a somewhat ignorant third party.  Usually this means they write rules that compromise their efficiency.


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#18) On September 20, 2009 at 12:46 PM, Tastylunch (28.71) wrote:

Fantastic post Checklist!

That's hilarious people think you are being reckless, Clearly the don't know what they are talking about.

The attornies that helped us with the sale process went so far as to tell the investment guys we eventually selected that in exchange for referring us to them, the money guys had to swear to not allow us to manage our own money or put it all in stocks.  Thats not a joke.

That's some effed up $hit right there. If I were you I'd be tempted to get new counsel. Your attornies clearly do not respect you.. My counsel would never throw me under the bus like that.

What kind of business did you have if I may ask? I'm in retail and commercial RE FWIW.

Congrats on your success as well!

Anyway if you've never read it How to make money in Stocks: A Winning System in Good Times and Bad by William O'Neill backs up a lot of what of you say.

It's in interesting read if for no other reason than it outlines how the professional money trades stocks (and consequently it and Invetsor's Business Daily are followed by a lot of that crowd).  I suspect you instinctively already know a lot of what it says but sometimes it's nice to have such thoughts  independently confirmed.

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#19) On September 20, 2009 at 12:53 PM, Teacherman1 (< 20) wrote:

CHECKLIST, like you I have always made my own investment decisions. I guess part of the reasoning was if I am going to lose my money, I would rather do it myself.

Heck, I don't even have a real broker. I buy and sell through the cheapest online broker I could find. My annual transaction fees are less than $180.00. It was not meant to be an active trading account, but until they decide to say STOP, I am going to keep using it that way.

I own only 20 different stocks at this time and tend to invest for the longer term, but I use the account regularly to adjust my positions.

I remember an old adage from my younger days (sadly now well behind me), "You make your money when you buy it".

This philosophy has worked well for me. 

I study my "possibles" thuroughly, watch them carefully, and am patient unless something fundamentally changes.

Good post. Well worth reading. 

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#20) On September 20, 2009 at 12:54 PM, Tastylunch (28.71) wrote:


I'm glad you brought that up

I have family in the business and I can tell you almost all of their coworkers at major houses are just glorified salesmen with very little working knowledge of the markets.

If you ever really wnat to knwo what these people know ask them what they did before going to work for Schwab etc.

I think people may be surprised to know what their broker's former careers often are.


Let me add a couple other  ones imho -

1)we don't have great returns every year so we can pursue longer term strategies that may not look good on an every month/quarter/year basis.

2) we can allocate whatever we want to stocks, thus we have the option of being out of the market entirely if we wish. That is a crucial factor the big boys don't have.




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#21) On September 20, 2009 at 12:56 PM, Tastylunch (28.71) wrote:


 That is a crucial factor the big boys don't have.

That is a crucial factor the big boys often don't have.

Shwoops omitted an important word there. Obviously some of the smarter hedgies (klarman, Tudor Jones) can do more or less do what they want.

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#22) On September 20, 2009 at 1:04 PM, IIcx (< 20) wrote:

rec #30 - great post!!!

The crash last October drove many of us to manage our own investments out of pure frustration but its easier to make a solid profit in extremely volatile markets. The other issue is setting up a tax differed account to trade with.

I agree with your 1-5 points and would add

6. You don't have to trade a basket of stocks and can choose the strategy you're comfortable with as well as the time frame you wish to hold a trade.


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#23) On September 20, 2009 at 1:37 PM, rd80 (95.81) wrote:

Excellent post and comments.

One big reason to add to your list:  You don't have to pay yourself a 1-2% or 2/20 management fee.

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#24) On September 20, 2009 at 2:29 PM, NOTvuffett (< 20) wrote:

This has to be one of the greatest blogs on the Fool EVER.  Like many people, I didn't have much exposure to the market besides mutual funds until last year.  We all know how the "pros" did with our money.  The market taught me hard lessons but it was worth it.

The only thing I may disagree with checklist about is the small cap stocks.  If you are young or just have money to burn that is fine.  But for people that are risk adverse and concerned about liquidity it doesn't work so well.


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#25) On September 20, 2009 at 3:30 PM, NOTvuffett (< 20) wrote:

totally unrelated, and not really about the market, but portefuille seems to be our resident physics guy.  Will they confirm the existence of the Higg's boson this year?  What about dark matter?


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#26) On September 20, 2009 at 4:41 PM, SkepticalOx (98.61) wrote:

Despite all these advantages, individuals investors are still losing to the market by a significant margin. Just because we can beat the market, doesn't mean we do, and by all accounts and by research (done in other countries but I'm pretty sure is valid to the US too), is that retail investors underperform the market by a huge margin. Most retail investors probably don't accurately measure performance of their portfolio either.

For all the advantages little investors have (Buffett said that if he had less than a million that he could return 50% a year), most don't use them. Here are some reasons why:

1) Individual retail investors don't have much time to put into research into companies that they invest in. Most have a day job that is other than stock investing. They simply don't do enough due diligence. Professional stock pickers do it for a living. 

2) Individual retail investors usually play the wrong game. While the markets are not always efficient, and often suffer from huge bouts of irrationality, the large caps stocks are usually priced more efficiently. And guess what? Most retail investors seem to invest in the mid-to-large cap territory, especially in companies that are hot or always in the news (Apple, for example). Just take a gander at Mad Money from time to time and see what stocks the callers are calling in about. Most are no small cap. Instead, too often people are playing the game where the I-banks and hedge funds have a huge advantage.

3) Many individual retail investors also lack the emotional fortitude and discipline required to invest their own money. They buy when prices are high and going up, and sell when prices are low and going down. This is especially true when the money they are investing is money they are relying on for their retirement or for their kid's college fund. If the money you put on the line is your own and you really need to count on it, it's going to have an effect on you emotionally. When you're investing with emotions, you're going to make some bad decisions.

Most individual investors are better off investing in index funds. While you won't beat the market, you'll beat 75% of the professionals out there over time. But if you want to try and go beat it by yourself, you'll need to spend a lot of time, do a lot of work, have great discipline and emotional fortitude, and a good dose of luck. And even then the odds are against you. 

While investing in the stock market is usually a positive sum game (not in the past decade unfortunately), beating the market is a zero-sum game with friction. 

Happy Investing! :) 

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#27) On September 20, 2009 at 5:41 PM, NOTvuffett (< 20) wrote:

While investing in the stock market is usually a positive sum game (not in the past decade unfortunately), beating the market is a zero-sum game with friction.

This is not true, there are many here can attest to it.

Just need to be choosey in what you buy and when.


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#28) On September 20, 2009 at 5:48 PM, NOTvuffett (< 20) wrote:

Ox you have a good point about the emotions.  One of the things that served me the best was making trades small enough that i wasn't emotional about them.


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#29) On September 20, 2009 at 6:50 PM, SkepticalOx (98.61) wrote:

#27 Not true? Please explain, because I think you are misunderstanding what a zero-sum game is.

In a zero-sum game, all the gains and losses total out to zero. In a simple game, this means that for every winner there is a loser. This is like chess, poker, or the options market.

In stock market investing, beating the market is a zero-sum game. For every outperforming investor, there is another one that underperforms the average. Not only does all the outperformance of a stock get cancelled out by the underperformance of others (because the market is just the average of all stock returns), but for every buyer (who benefits if price goes up after the purchase, and loses if it goes down relative to the market), there is also a seller (who has the inverse situation).

Beating the market being a zero-sum game doesn't mean there isn't outperformance. It means that for all the outperformance there is an equal number of underperformance. 

Then you add the friction (taxes, commissions, and fees), and the odds are against you beating the market.


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#30) On September 20, 2009 at 6:57 PM, starbucks4ever (92.29) wrote:

I am sure an individual can beat the pros, but I don't think an individual can beat the market.

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#31) On September 20, 2009 at 7:52 PM, SkepticalOx (98.61) wrote:

If you like this blog, you should definitely check out EveryDayInvestor's blog on trading: So You Want To Be A Stock Trader?

One of the best posts on Fool's blogosphere in my opinion...

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#32) On September 20, 2009 at 8:42 PM, Tastylunch (28.71) wrote:

Of course an investor can beat the market even with friction.

Numerous people have done it over multiple decades

The better question is are you willing to have the discpline, put forth the time and effort it will take to do so.

If you are not than Index funds are probably right for you.

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#33) On September 20, 2009 at 8:56 PM, uclayoda87 (28.70) wrote:

"Most" individual investors don't beat the market because they invest in managed mutual funds which usually can't beat an S&P 500 index fund, so SkepticalOx's statement is technically correct, but individuals can be better than the mean and they don't have to be named Jim Rogers.

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#34) On September 20, 2009 at 9:05 PM, prose976 (< 20) wrote:

I'm showing anyone willing to take the time, how I not only smash the pros and the market, but I can make 50%+ gains per year with my proven method and consistent account maintanence.

This is a real life demonstration using my real life portfolio, real life money and actual transactions recorded right here on my blog for any Fool who wants to see how it's done.

I am proving this blog to be a correct statement, not an exaggeration or pipe dream, scam, scheme, etc.  I hope it sheds a little light on the "secret" that doesn't really exist.

Fool on!

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#35) On September 20, 2009 at 9:21 PM, NOTvuffett (< 20) wrote:

hey SkepticalOx, I understand what a zero sum game is- there is a finite pie and somebody wins somebody else must lose.  This isn't true.  The pie is growing, otherwise people wouldn't even mess with a site like the Fool.

I bought WFC at 9 and change, sold it for 24.  Did I cheat somebody out of their money?  No, it is an excellent company, I sold it for what I thought was a fair valuation.  It was just more productive to put the money elsewhere for me at the time.  Who is the winner and loser there? I think it is around 28 now?  I took my money and made more with it.

Am I concerned about frictional costs? Yes.  The tax man is going to beat me up this year. But I don't know how everyone can escape massive tax increases or inflation in the next ccouple of years.


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#36) On September 20, 2009 at 11:19 PM, SkepticalOx (98.61) wrote:

NOTvuffett, you're not getting it still. Beating the market is a zero-sum game. 100% of investors cannot beat the market, cause how can everyone earn a return that's higher than the average (the market)?

Also, the stock market is not always a growing pie. If you started investing 10 years ago... the market, especially the US one, grew and then fell back to where it was (which is results in no growth over the decade as a whole). 

Secondly, the original seller @ $9 lost out on the rise up. He lost out on that performance when you gained.

Thirdly, some other investors aren't investing in WFC, and invested somewhere else that didn't perform as well as the market.

The stock market is filled with millions of participants and billions of transactions, but the fact that for every overperformance of the market, there is an equal amount of underperformance (and if you add all the performance together you get the... AVERAGE). 

I'm not saying you can't beat the market as a small investor... but the facts are that the odds are against you and that most people DON'T BEAT THE MARKET. 


And I'll let EverydayInvestor (in another post) do the talking in case I didn't explain it well enough:

alstry said: 

"Actually, trading is NOT a zero sum game where for every winner there is a loser.  Imagine a person buying a share of stock for one dollar and trading out at two for a 100% profit.  Then that person who bought the stock trades out at three for a 50% profit.  And the person who bought at three trades out at six for a 100% profit.

In the above hypo, we have three traders all making profits trading the same stock sequentially upward."

Alstry -- you are forgetting the investor who sold the original trader his stock at $1. He misses out on all the profits. As I said, the gains in the stock market as a whole will accrue to the investor class as a whole who have to (by definition) hold a market-cap weighted basket of all stocks. So all long-term gains in stocks are part of investing, earning a market rate of return. Once you look at trying to beat the market, any outperformance must come at the expense of someone who underperforms the market. So while you may say that the original owner of the stock does not lose, he loses out on getting the market rate of return because he sold his stock. That is an economic loss.

By framing this example as you did you obscure the zero-sum game (trying to beat the market) within a positive-sum game (investing).


Got it yet? :) 

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#37) On September 20, 2009 at 11:28 PM, SkepticalOx (98.61) wrote:

#33 - I never said individual investors can't beat the market. I said that most individual investors vastly underperform the market over the long-term, that beating the market after costs is difficult, and that the odds are against you beating the market.

The passive investor investing in index funds will beat 75% of pro's, and probably even more percentage of retail investors, who have less time to invest (and watch shows like Mad Money... btw, Cramer underperforms the market with his picks), and are less disciplined.

And if you don't believe me... just try asking a random sample of CAPS users what their long-term annual performance is, and then ask them to post audited investing statements to prove it. I'll bet you that the majority underperformed.

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#38) On September 20, 2009 at 11:49 PM, checklist34 (98.71) wrote:

holy!  thanks for all the replies folks, this got to be quite a thread.

Porte, it wasn't my intent to indict all hedgies or fund managers as bad people or non-performers...  it was to say that the little guy can win and to make a name-no-names FU post to those hedgies that harassed me all through the first quarter of the year.  :)

Its basically cast in stone that I beat them from the day we met to the end of time, i'm so far ahead now that just buying MO and collecting the dividend should keep me well ahead of them now and forever.  ...  which is gratifying.  They were not very polite.

I'm sure there are some good proper fund managers out there, but I never met one is all. Well, thats not true at all.  I think heartland funds does a great job and I'd be willing to put some money with them some day...  They substantially outperformed the market from last november through this may, and i'm sure after that as well.

The thing that grated on me was the constancy of the "you can't do tthis yourself" sales pitch, which seemed to be basically the one and only sales pitch they had to offer.  

I'm not insulting an entire large group of people, i'm offering that the little guy has some advantages over the big guys and, frankly, I would guess that pro's on average underperform the market.  especially when their heinous fees are taken into account.




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#39) On September 20, 2009 at 11:52 PM, checklist34 (98.71) wrote:

anticitrade, good additions.  i like your ivory tower especially.

Wall Streets greatest talent is selling itself as smart.  And the success of its sales pitch isn't limited to its ability to woo potential investors in funds...  they sell themselves on that even more effectively than they sell us... 

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#40) On September 20, 2009 at 11:55 PM, NOTvuffett (< 20) wrote:

Ox, all i am saying is that any that will take the time to read sites like this will handily beat the market, the other money is passive, managed by pros and underperforms by and large.

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#41) On September 21, 2009 at 12:03 AM, checklist34 (98.71) wrote:

Ox, I don't konw if I buy the argument that individual investors in aggregate do much worse than the market, and ...

... if you could filter out gambling on penny stocks (like insane penny stocks like CBIS and things, I don't mean buying shares of MCGC or GNW when they went under a buck) and

if you could filter out the losses from biotech speculation (which I can only assume most mutual funds don't engage broadly in) which seems like a negative sum game and my advisor concrus:  he says that he believes, although he's never added it up, that biotech speculation (gambling on that miracle drug) costs his clients considerable money over time.

Filter uot just those two sins that are perhaps most common to the individual investor and I bet they beat the market.  

Dreman, in his book "contrarian investment strategies:  beat the market by going against the crowd" feels that its pros that are behind the ball.  Peter Lynch similarly harpooned profesional managers in "one up on wall street".  Dreman discusses some historical data demonstrating that funds lose, offers various statistic, and so forth.

Dreman further demonstrates that buying stocks that are cheap (by price/book, price/cash flow, price/earnings, price/dividend) dramatically beats the marekt and the pros.  He waxes on at great length with various reasons and hypotheses of why the pros don't follow these basic guidelines.

Lynch says "nobody ever lost his $1 mil job losing his clients money on IBM" or something similar.

We will see if checklist_34 can continue to beat the street...  and the market.  I think I can do it.  :)

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#42) On September 21, 2009 at 12:05 AM, checklist34 (98.71) wrote:

zloj: it is at this time all but cast in concrete that i'll beat the marekt in my life.  a 235% head start gets you well ahead.  The S&P would have to hit 3000 while I don't make any more gains to catch up.  Its over, I won. 

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#43) On September 21, 2009 at 12:07 AM, checklist34 (98.71) wrote:

tastylunch:  there were 3 businesses, 2 manufacturing and one engineering.  please do forgive me for being so vague with the reply, but I like anonymity on the internet. 

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#44) On September 21, 2009 at 9:58 AM, SkepticalOx (98.61) wrote:


You assume that most individual retail investors are go against the herd. I'd disagree. Most individual retail investors are in bliss when the market goes up and they don't want to miss out on gains, and they're in panic mode when the market is going down.

Most don't follow Buffett's famous line that he seeks to "be greedy when others are fearful, and fearful when others are greedy".

From all the academic research, regardless of what type of investor you are, big-time, small, pro, amateur, etc., the majority don't beat the market over the long-term. The amount of people who actually beat it are very small relative to those who don't.

You are way too optimistic on the irrationality and behavioral flaws of retail investors. For all their claimed advantages, most don't use them.

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#45) On September 21, 2009 at 11:33 AM, anticitrade (98.68) wrote:

I agree with you OX that most individual investors fail to take use their advantages.  Most insist on competing with the large institutions weakness against strength, they will always lose. 

This is why blog posts like this are so valuable.  They help people recognize HOW they should be competing.

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#46) On September 21, 2009 at 11:42 AM, checklist34 (98.71) wrote:

ox, i don't doubt that many/most retail investors follow the herd. 

but most pro's do too.  

and who claims retail investors have advantages again?  its got to be 10:1 people mocking them and talking about their inevitable failure -vs- people really giving them any credit.

throw out gambling (zero-company penny stocks and biotech gambling) and I bet retail investors do better or no worse, sans "friction", than the pros and I bet practically all of the dramatic success stories this year are retail-side and not pro-side.  

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#47) On September 21, 2009 at 11:46 AM, checklist34 (98.71) wrote:

antici:  you raise a good point here, i think.  individuals CAN play the odds and as I and you and others note above, the pros are considerably constrained from doing so for various reasons.


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#48) On September 21, 2009 at 4:09 PM, Tastylunch (28.71) wrote:


no problem you told me all I wanted to know anyway. As an SBO myself I can relate to being carfeul about what you share where you share.

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