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Comment by jrockway | Hacker News Reader

What's the source of "investors as an aggregate never beat the market"? I used to believe this, but as I've learned about options and futures, I don't buy it anymore. (If we weren't beating the market, what would be paying my salary at an investment bank?)

Even the simplest options strategies can give you a fair return on your money in a very short time, certainly better than a 5% APY savings account or a 10% annual return on your index funds. (And, you can use options as security on your stock positions, and you can use them to make money on your safe stock positions.)

Anyway, not buying it. You can beat the market.

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Every year you can compare actively managed mutual funds with the market. In any given year 70% of them offer sub-par returns. In any given 5 years, even fewer of them win. In a study I saw a decade ago, across all such funds over the last few decades, only two had put in a performance that was unlikely under chance.

It was unlikely that anyone would have performed as well as Peter Lynch. But not 99% unlikely.

Warren Buffett is clearly a statistical outlier. However other things can be cited for his performance. (Including his excellent management skills, and the fact that he every so often gets very lucrative opportunities that are not available to the market. See, for instance, his sweetheart Goldman Sachs deal in 2008.)

This said, in defense of the mutual funds, most actually managed to outperform the market in the long run. However the amount they outperformed by was less than their expenses for doing so. So your employer is likely beating the market, but is failing to so so for their clients once they subtract your salary and their profit margin.

Incidentally the study that I saw excluded the performance of hedge funds. This excludes some well-known long-term successes like George Soros. The wide variety of strategies that they follow is just too hard to calibrate and do statistics with. However on average it seems that they also lose to the market as a whole. But with much larger volatility in their results.

As for your "simplest options strategies" there are plenty of option strategies, such as covered puts, that will increase your average returns at normal times, but deny you excessive returns when the market does strange things. However a disproportionate fraction of long-term returns happen in sudden events that you will miss. If options are correctly priced, in the long run you don't beat the market with any of them.

As for whether options are correctly priced, that is a matter for debate. But I guarantee that the current market price of options has priced in the most widely accepted theories on how to correctly price options.

I generally enjoy your posts, but a couple points:

1. As another commenter wrote, investors as an aggregate are the market (hedgers, as another listed, are also considered, or could be considered investors who are investing for reasons other than direct belief in the individual companies/stocks).

2. Investment banks don't need to be investing. It's not their business, which is underwriting securities or acting as broker-dealers for M&A work. What we've seen in recent years are investment banks with trading divisions, but the act of investment banking is a separate business, and it's the performance of the investment banking team that should be compensating them.

3. You talk about option strategies, but for every move you make, say buying a call, another party had to have written the option. For individual investors, your point could still be very accurate. However, at some scale (though ridiculously large these days), this will break down.

That said, I do agree with your final point. An individual can beat the market.

1. As another commenter wrote, investors as an aggregate are the market (hedgers, as another listed, are also considered, or could be considered investors who are investing for reasons other than direct belief in the individual companies/stocks).

Fair enough, I set myself up for that. It sort of like, "if a million people join this group, this group will have a million members", though.

But both parties theoretically benefit. Imagine you want to sell some stock, but you don't care that it happens today. Just write a call for it, collect your premium, and if the stock hits the strike price, it will probably be called away. But if not, you got some free money.

On the other side, the call buyer is protected against a severe market fall. If he bought the stock and it pulls an Enron, he would have lost a significant amount of money. But if he has the call option, it just expires, and he is out a few bucks per share.

So as with anything, spending money isn't necessarily taking a loss, but getting the money is taking a gain. (Consider homeowner's insurance -- even though your house is probably not going to burn down, few people consider the insurance a waste of money. You win peace of mind, and the insurance company gets some chump change.)

But I guess we mostly agree. I spent a long time thinking there was nothing interesting about the stock market and that everyone should just buy index funds, but now I am not so sure. A slightly more aggressive trading strategy could slightly increase your returns.

Presumably because "investors as an aggregate" is the market. The Efficient Market Hypothesis is pretty much a tautology, and is therefore completely useless.

Exactly. Market = Investors + Hedgers. Hedgers are willing to lose money in exchange for less risk. It's like car insurance, you know the expected value is negative but you buy it anyway.

"active investors as an aggregate" are the market, so of course they never beat it.

By most definitions "active investors" are traders, not investors.

The other problem is that the alternative to not beating the market is picking a generally underperforming mutual fund and giving up almost half of your profit as management fees.

If you get 8% on your mutual fund and the manager takes 2% then.... $1000 * 30 years @ 8% = $10,935.73 $1000 * 30 years @ 6% = $6,022.58 (10 935.73 - 6 022.58) / 10 935.73 = 0.449274991

The problem with most people when they go into the market is that they use a buy high sell low strategy. They buy into the market when "it's doing well" and sell when "they lost their money"

"even the simplest of options strategies" - can you provide a link to a good resource?

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