Most Investment Strategies Don't Work

Pick A Method

If you've ever gone to the library and browsed the business section, then you've noticed how many people have written books on investing. It's a popular topic to write about. It's apparent that many investors, after having experienced some level of success, have felt compelled to write a book about their methods. Among the authors are mutual fund managers, wall street analysts, day traders, long term investors, stock brokers, newsletter writers, professors, and investment journal editors. 

The authors tout all kinds of methods and formulas that have worked for them - buying stocks with low price/earnings ratios, buying stocks with high price and earnings momentum, small stocks, big stocks, medium size stocks, low price stocks, technology stocks, insider trading, technical analysis (chart reading), and fundamental analysis (analyzing company balance sheets and profit & loss statements) - just to name a few.

Probably a few of these methods have some merit, but eventually, many of them fail after they become popular among the general public. In fact, if a particular method has worked for some time and a book is written about it, chances are that it will soon cease to be profitable as more and more people try to buy and sell the same stocks at the same time.

The Rise And Fall Of Market Gurus

Throughout history, there have been many people who have had such good luck with their particular method of investing that they have come to be known as “market gurus”. Market gurus come and go with regularity. It all begins with a market professional who has a streak of winning market calls over a period of years. Eventually, he or she becomes a prominent media figure who is widely renowned as a market guru - one who's every word hits the news wires like a lightning bolt, sometimes even capable of moving the markets single-handedly. Eventually, most of these market gurus run into a string of bad market calls and slowly fade away into anonymity. Others crash and burn after a spectacular doomsday prediction proves to be false. Now this isn’t to say that none of the market gurus deserve their title, but the question is, how can you know which of these market experts are truly gifted, and which are just lucky.

How Many Monkeys Does It Take To Beat The Market?

Consider what you would expect from a purely statistical viewpoint. Let's define a "market guru" as someone who has beaten the S&P 500 stock index for 5 years in a row. If we were to start off with 1000 monkeys who picked stocks by throwing darts at the stock listings in the business section of any local paper, how many of the monkeys could be classified as "market gurus" after 5 years. Well, let's assume that in any given year, about 50% of the monkeys perform better than the S&P 500 stock index. This is more or less reasonable since the S&P 500 stock index is supposed to be representative of the average stock. After the first year, that leaves 500 monkeys who are candidates for the market guru club. As the table below indicates, if you continue on through the fifth year, you're left with 32 monkeys who have been consistent market beaters.

But, would you invest your money with one of these 32 monkeys? Of course not! Consider a historical fact - studies have shown that, on average, investing your money with a mutual fund that has been a great performer in the past is no more profitable than investing in a mutual fund that has only had average performance in the past. Why is this? It may be the same statistical phenomenon that was applied to the monkeys above. A few of the fund managers got lucky!

Now don't misunderstand the point being made here. Market analysts and mutual fund managers are certainly smarter than monkeys. They are well educated, well read and well informed about world events and the economy. But perhaps their intelligence is working against them. If they are all watching the same news stories and reading the same financial periodicals, won't they tend to be influenced towards the same logical conclusions? And subsequently, will they not be simultaneously trying to buy and sell the same securities, driving prices up and down and making it very hard to get in and out of positions at a reasonable price?

Consider another historical fact - on average, only about 15% of mutual fund managers are able to beat the S&P 500 stock index in any given year. Think about this - 5 out of 6 of these managers are not able to buy and sell stocks for their mutual fund portfolios that beat a basket of average stocks. What's more, according to The Hulbert Financial Digest, which monitors the performance of investment advisory newsletters, as of January 1999, only 4.4% of the investment newsletters had beaten the S&P 500 over the previous 5 years. That means that 19 out of 20 of these investment advisors could not pick stocks that performed better than average!

How can this be? These are the professionals. This is their full time job. They watch the market each day as news unfolds. They are continually talking to the management of companies that they are investing in. They know the insiders. Why can't they beat the market?

Now ask yourself these questions. How can you hope to do better than the professionals? What resources do you have that the experts don't? They have the news even before the average investor does and it doesn't seem to help at all!

How To Beat The Professionals

In order to beat the market you must use methods that are better than those used by the experts. The methods that you must use should not be dependent on late breaking news stories. They should not be based on advice from the experts or on advice from the managements of publicly traded companies. To be a successful investor, the method you use must be able to see the hidden causes and effects that will make people feel compelled to buy stocks - before they buy them. This is exactly what our artificial intelligence computer programs are designed to do.