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You’re Below Average. (And so am I.)

There. I said it.

You’ve probably spent your whole life learning that you have above-average intelligence and above-average work ethic. And, when considering the entire population of people around you, that may very well be true.

But if you plan to pick stocks (or do anything else to beat the market), the group that you’re being compared to is no longer same group. The fact that you’ve been above average at everything else in your life doesn’t necessarily mean much here, because the same thing is true about your competitors.

More important, though, is the fact that this isn’t just about intelligence.

It’s about resources.

Time: They have more of it. They do this full-time. You probably don’t.

And if you’re currently thinking “Sure, I do this in my spare time, but I still work on it for roughly 40 hours a week,” you’re kidding yourself. I’d be surprised to hear of very many fund managers who call it quits after putting in a 40 hour week.

Data: They have more of it. There’s nothing that you can find in your Motley Fool newsletter or Morningstar subscription that they don’t have access to as well.

News: They get it sooner. Many of your competitors are literally on the floor of the NYSE. When something starts to happen, they can react far more quickly than you can.

Don’t worry. I’ve got some good news too.

The good news is that you don’t have to beat the market to be a successful investor. (This concept doesn’t get nearly enough media coverage.)

It seems to be a pretty safe bet that the businesses in our global economy will continue to earn a net profit for the foreseeable future. Capture your share of that profit, and you can build a great deal of wealth.

For the most part, all you have to do is invest regularly, select an appropriate asset allocation, diversify within asset classes, minimize costs….and then not screw up by bailing out on your plan.

Added bonus: It’s actually less work to match the market than it is to underperform it. 🙂

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Comments

  1. I usually try and pretend I have above avg. intelligence… but below avg. work ethic =)

  2. Niklas Smith says:

    “Added bonus: It’s actually less work to match the market than it is to underperform it. 🙂 ”

    How true! A good catchphrase, actually!

  3. “you don’t have to beat the market to be a successful investor…For the most part, all you have to do is invest regularly, select an appropriate asset allocation, diversify within asset classes, minimize costs….and then not screw up by bailing out on your plan.”

    If you do that, what happens?

    Are you are guaranteed a worry-free retirement?
    Are you sure there’s no chance anything bad can happen?

    I don’t like to be negative, but being oblivious is not the answer. There is no plan guaranteed to work for each investor. Being oblivious means cloisng your eyes and hoping for the best. ‘Hope” has never been, not can it ever be, a winning strategy.

    Nor is it reasonable to anticipate that you can just assume the economy is going to prosper and that your share will amount to anything.

  4. Mark,

    “Are you are guaranteed a worry-free retirement?” No, of course not. Exactly as you mentioned, “There is no plan guaranteed to work for each investor.”

    I disagree wholeheartedly though with your statement that “Nor is it reasonable to anticipate that you can just assume the economy is going to prosper and that your share will amount to anything.”

    Describe a scenario in which the global economy does not turn a profit over an investor’s lifetime. When I imagine such a scenario, all I see as worthwhile investments are guns, ammo, food, and water.

    Frankly, given my set of skills, I know I’m dead in the water regardless of my investment approach if anything like that were to occur.

  5. Mike,
    It doesn’t have to be that bad. We can easily have very low growth with a fluctuating stock market. And ‘growth’ over an investor’s lifetime may not matter. A situation in which the stock market is 10 to 20% higher in 30 or 40 years is not going to enable people to retire without financial worries.

    Or we can have more frequent bear markets – boom and bust, with a net positive result. But if someone needs the cash when the markets are down, it’s not going to be there. I know – asset allocation – less in stocks as the investor ages. Is that enough to do the trick?

    Why not protect against those scenarios by insuring that a bear market cannot do much damage to your account? I’m not recommending active investing, but I do think almost every investor (except those who can spot and buy all the winners) can benefit by using options – specifically collars to prevent disasters.

  6. “And ‘growth’ over an investor’s lifetime may not matter. A situation in which the stock market is 10 to 20% higher in 30 or 40 years is not going to enable people to retire without financial worries.”

    I’d agree there.

    Still, a 10-20% total return on equity for the global economy over a 30-40 year period seems exceedingly unlikely to me. And I’d argue that such a scenario is approximately equal to a global economic collapse–a situation in which the concept of retirement is already completely out of the question for pretty much everybody.

  7. Michael says:

    Very good article.

    In my opinion, it is all a matter of market timing. It does not matter if it is gold, oil, or Microsoft, if you have access to good market timing signals, they will help you get in and out at a profit.

    No guarantees in this business, but if they are right most of the time, you can still make $s.

    There are may web sites providing them out there (search Google). Just find one that works and use it!

    Its Dow Jones timing signals are up 44.7% as of 6/24/09 while the Dow is up just 26% off its March lows.

    Following a market timing system works!

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