If the markets were truly efficient, randomly picking stocks would beat SPX ~50% of the time. Since markets are not super efficient, basic exposure to performance factors (small cap, value, momentum...) puts you at a fairly high likelyhood of beating SPX.
This assumes that the expected return of a single, randomly-picked stock is symmetrically-distributed. It is not, single stock returns are highly skewed and "lottery like". Index returns come from the fact that a small number of stocks do exceptionally well, while most of them do poorly.
This becomes even worse if we talk about timing: stock returns come from relatively short periods of doing really well, if you miss that because you are out of the market for some reason, you lose out on the vast majority of the index return.
Sorry, I don't have specific sources to cite. This comes from stuff I've picked up listening to the Rational Reminder podcast (https://rationalreminder.ca/podcast-directory), which have very well researched episodes as well as guest interviews with leading academic finance researchers. I'll try to dig up the relevant episodes, which do cite sources.
Edit: here is some sources:
1. https://www.dimensional.com/us-en/insights/singled-out-histo...
2. https://assets.jpmprivatebank.com/content/dam/jpm-wm-aem/glo...
Quote from this last one: "[...] around 40% of the time a concentrated position in a single stock experienced negative absolute returns, in which case it would have underperformed a simple position in cash. And around 2/3 of the time, a concentrated position in a single stock would have underperformed a diversified position in the Russell 3000 Index. While the most successful companies generated massive wealth over the long run, only around 10% of all stocks since 1980 met the definition of “megawinners”."
There were 4 moments when I thought - I should buy this stock for some reason, e.g. after ChatGPT I thought about buying NVidia. But I decided to continue being a purely passive investor. Now I regret that decision because all of those stocks overperformed.
I also correctly guessed that 3 out of 4 stocks would underperform (TSLA was the wrong call). It seemed obvious that the market was dumb about GME, AMC and TLRY.
Sure, many active investors are extremely sophisticated but what if the average invested dollar is kind of stupid?
Also, one minor nitpick about Ben Felix's content is focus on historical statistics. I think this gives you a false sense of confidence and security.
The stocks you are looking at are all stocks that have been popular with retail investors, and retail, as a general force, isn't out there doing equity research, incorporating all available information, estimating risk, and allocating its portfolio along the efficient frontier. Retail investors move the market, and there is money to be made if you can quantify how much of that move is driven by short-term sentiment.
That said, the market can remain irrational longer than you can remain solvent, sometimes "irrational" positive sentiment is coincidentally well-placed, and irrational sentiment is contagious and difficult to see through sometimes. Because of these factors, IMO any kind of active investing strategy should come with some kind of risk management component, where if your active bets blow up, you don't lose your life savings. Personally, I keep active bets to <20% of my portfolio, I'm extremely careful with leverage (margin, options, futures), and I put stop-losses on any particularly volatile position and any that incorporates leverage. I want to have it so if I'm dead wrong and also I fall into a coma and can't unwind my trade, my position still can't screw me.
And who is arguing that they are perfectly efficient? Markets work on information, which is not (initially) evenly distributed and because of the physics can only spread at the speed of light once it is known.
The latter was used to detect insider trading:
* https://www.npr.org/sections/alltechconsidered/2013/09/24/22...
For the former, people are renting satellite time to get to information that no one else has to determine trades:
* https://newsroom.haas.berkeley.edu/how-hedge-funds-use-satel...
> Since markets are not super efficient, basic exposure to performance factors (small cap, value, momentum...) puts you at a fairly high likelyhood of beating SPX.
Two of the proponents efficient markets explain why (and shared a Nobel for the work):
* https://en.wikipedia.org/wiki/Fama–French_three-factor_model
The two are not mutually exclusive, and there is published literature on it.
Good interview with Fama (audio, video, transcript):
I agree.
Meta was literally priced below $90 not even a year ago (I entered at about $100 FWIW, which was my nice and round number). Now at $315. Anybody who believes the market is efficient is on some serious drugs.
The market correctly valued Meta a $380 or so before the crash (because "TINA" I'm supposed to believe), then correctly valued it a few months later at $100, then now is again correctly valuing it at $315?
Please. Just please.
I'll go much further: none of these valuation are correct. The market is highly inefficient.
Then Meta announced they were going all in on the Metaverse, had set fire to $100bn so far and were going to continue to throw ~$20bn a year into the Metaverse - the market correctly valued Meta a $100.
Meta announded they were going all in on the Ai - the market correctly valued Meta at $315.
You have picked a poor example; the moves in the stock, are primarily the fault of themselves. Those that saw the emergence of Ai and Zuckerberg as one of the leaders in the space got a nice 3x. If it didnt happen, Meta stock would probably be worth about as much as MySpace.
fwiw I said they were going to zero when they rebranded to Meta. Turns out I was wrong.
There's nothing wrong with 3x changes. A lot can happen in a year to diminish or improve a company's outlook -- even a large company. And yes, by 3x -- or even much more.
The onus of proof here is on you to explain why those don't reflect largely realistic estimations of NPV of future profits, and to explain why you think you have better information, experience and judgment than the market.
This is of course assuming that we are at a level playing field. I don't believe for one second that insider trading is not prevalent.