Why Do People Think They Can Beat the Market?

Think about it. From a sales point of view, you have a great product. Investing in the stock market has pretty much outperformed all other asset classes. It’s done so for a long time. You have charts to prove it. Unfortunately, it doesn’t move in a straight line and leadership rotates. You can’t have everything. Yet many would be investors are confident they can beat the market. They don’t need you. Why do they think that way?

A Dozen Reasons Why I’m Better than You

As a financial advisor , you know a great deal of an investor’s return comes from asset allocation and diversification. Between your advice, asset managers and ETFs, you can cover most of those bases. Yet many people walk to take a different path.

1. Resurrection. “This stock was once $ 50.00 It’s now $ 3.00. It’s a household name. It will come back.”

Their rationale: Big names don’t fail. They come back. You must have faith.

What can go wrong? Big firms do fold. Even if they restructure, debtholders are ahead in line. The original shareholders come last.

2. Penny stocks: “I can own many, many shares.”

Their rationale: All it has to do is move a little bit and I’ll be rich. A move of a few cents is proportionately larger because of the low price.

What can go wrong? This can be a thinly traded stock, not on a proper exchange. It might be manipulated by the people telling you about it.

3. Hedge funds. “I’m buying into one. They can do things no one else can.”

Their rationale: Whenever they are portrayed on TV, they are always rich, successful and smart. I want them on my side.

What can go wrong? There are thousands of them. Many types too. You often only hear about the really successful ones. The fees are high. Liquidity is an issue. Are they picking the right one?

4. Inside information. “My friend heard something from a friend of a friend. These guys are announcing a new product that will reinvent the (whatever) industry.”

Their rationale: I know something others don’t. It’s a sure thing.

What can go wrong? It might be a rumor. Even if it’s true, the regulatory authorities study trading before and after the announcement, looking for anomalies. Your friend will give you up.

5. Cycles. “The market works in cycles. I may be losing money, but if I continue doubling up, I can’t lose.”

Their rationale: Things eventually turn around. You must be patient.

What can go wrong? You don’t know the length of cycles. In roulette, some people bet on red or black. If they lose, they double up. They keep on doubling up until they win. They may run out of money before their losing cycle ends.

6. Day trading. “I saw this guy on TV. I can quit my job, become a day trader and live lavishly.”

Their rationale: It looks so easy. I go to a class. I learn this stuff. I can’t understand why more people aren’t doing it.

What can go wrong? Short term trading is gambling. The reason more people aren’t doing it is because it doesn’t work long term.

7. Leverage. “If I borrow on margin, I can make big money off short term moves in the market.”

Their rationale: I’m using other people’s money. Isn’t that what the pros do?

What can go wrong? The losses are also on your side of the equation. Your equity can be wiped out. You have borrowing costs too.

8. All I need to do is watch the financial news on cable TV. “It’s all out there. The guys on TV tell you what to do.”

Their rationale: They sound so confident. If they were consistently wrong, they wouldn’t let them be on TV, would they?

What can go wrong? There are lots of people talking about lots of companies. Statistically, someone will eventually be right about something. Balanced journalism involves putting forward two points of view. Let the viewer decide. One will be right. Did you pick the right one?

9. Buyouts by competitors. “This little Silicon Valley company has a great product. They will probably get bought out by the big guys.”

Their rationale: The major tech companies have a history of buying up smaller competitors to gain technology and reduce competition.

What can go wrong? There are many little tech companies. Have you picked the right one? Will they stay in business long enough to get bought out? Why not buy a small cap tech fund instead?

10. It’s the next Apple. “I’m getting in on the ground floor.”

Their rationale: I’m getting in on the ground floor.

What can go wrong? When a new technology appears (like TV) many horses are at the starting gate. Only a few finish the race.

11. I have info the experts don’t. “I study fundamentals. The big funds don’t bother.”

Their rationale: I have a system. It hasn’t been discovered by others.

What can go wrong? It’s the logic behind sports betting. Study enough numbers and you can beat the experts. There are more experts out there than you realize.

12. Really alternative investments. “I’m putting my money into fine art. Wine too. They have outperformed everything else.”

Their rationale: I found out about this myself. Why hasn’t anyone told me?

Related: Why Wealth Building is like Weight Training

What can go wrong? These are often thinly traded markets. Only the best of the best produce the highest returns. Big money is required. Fees and insurance are high.

Everyone is looking for a better mousetrap. Traditional investment markets have been delivering solid returns for a long time. Investors must take a long term view. Patience is a virtue.