My Publicized Personal Journal

Can we beat the market consistently over a long period of time? I define beating the market as producing higher percentage returns compared to commonly known market benchmarks such as the SP500 for US market or the JCI for Jakarta market.

Facts:
The benchmark indices (SP500 or JCI) are constructed to mimic the peformance of all stocks included in those indices.

By construction, the market performance reflects the average performance of all stocks included.

Issues related to the construction of market benchmarks will be discussed later.

Academic Views:
The bulk of financial literatures suggest that the market is highly efficient in such a way that NOBODY can consistently beat the market over very long period of time. Those who did, they say, were just lucky.

This notion of market efficiency were the one responsible for the growth of exchange traded index funds (ETFs).

My Views:
As mentioned before, the market performance is tied by the rule of averages.

I could not find compelling reasons why nobody could consistently outperform the averages. History has shown that they are successful traders and investors. Warrent Buffets, George Soros are among the more well known ones. I believe that it is safer to attribute their stellar performances to skills rather than lucks.

So what skills do we need to beat the market?
In my point of view, there are at least three skills to master:

1. Market Timing
2. Assets selection
3. Position Sizing

If we can master at least one of them and do not screw up on the other two areas, I believe we can already beat the market. If we can master the three, that is amazing.

The market is constrained on all of these three areas:

1. The market, by definition is always there. It can not choose when to get in and when to get out.
2. It also include everything that has already been choosen to form the market. Of course, some major indices like the SP500 select and deselect its components every now and then. But we need more than that.
3. The importance of each stocks in the market is also rigid and set in advance.

Every investors will always be confronted with these questions: Should I get into the market now? Which markets? Which assets or stocks to choose? How much of my capital to put in?

We shall discuss these three key topics later. I am still learning. So let’s learn together.

This entry was posted on Saturday, April 21st, 2007 at 1:42 am and is filed under investing. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.