An Obvious Way to Beat the Market

Jan. 15, 2024

Warren Buffett once said that, in his lifetime, he’s only known a dozen people who were able to beat the market over time.

Whoa, that’s daunting.

If he’s known hundreds of investors and only twelve were able to beat an index fund, it must be super hard.

Maybe even impossible.

But is it, though?

In my tennis career, I’ve coached hundreds of students and only 5 went on to get a world ranking.

Does that mean it’s impossible.

Absolutely not. Five is actually a really high number.

Why? For several reasons. The  biggest one? Not everyone wants to turn pro.

Almost everyone doesn’t.

In my life, I’ve known six people who actually had the pro tour as their goal.

And five made it!

I wonder how many of those investors Buffett knew really wanted to beat the market. Not say they want to in order to impress people, but actually try to do it. It’s almost certainly not very many.

The other big reason is that people get emotional and quit.

Turning pro in tennis is not complicated. It’s just that nobody really wants to do it. They don’t want to do the work and they run for the hills as soon as they lose a couple matches.

The path to the Tour is obvious. But the lack of persistence ends the journey prematurely.

It’s the same for trading.

The path to beating the market is obvious. But the ability to believe something that the index funders don’t want you to believe and the stomach to handle drawdowns ruins everything.

Case in point.

Here’s the SPY from 2004-2024 if we bought-and-held $10k that whole time:

Our $10k investment would have grown to $60k, and we would have beaten every hedge fund manager on earth. 

Plus, we would’ve beaten every person Buffett knows except 12 people. 

Hooray.

Does that mean it’s hard to beat? Not at all.

Using the exact same buy-and-hold rules–which is ridiculous, of course; we can trade any way we want to–here’s what would’ve happened if we chose QQQ instead of SPY (or VOO or any other index fund):

Huh, look at that.

QQQ turns our $10k into $130k. QQQ beats the market by a country mile. No extra work. No extra knowledge.

Just twice the money.

So, why isn’t everyone beating the market using QQQ?

It’s mind-bending.

Maybe it has something to do with drawdown. QQQ has more drawdown.

But if we’re going to get 50%+ drawdowns in SPY (which we will), why not tolerate a little more drawdown for twice the money?

It’s crazy.

Beating the market is as easy as typing three different letters on a keyboard.

But that’s not all. In our next Newsletter, we’ll go over several more easy ways to beat the market.

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.