Traders compete with invisible opponents

Trading stocks has become very popular in recent years, but the vast majority of traders receive lower returns than they would if they simply invested in a low-cost index fund.  A video on the Bloomsbury Wealth YouTube Channel.

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Transcript: Robin Powell & William Bernstein/ Financial author.

RP: Trading stocks has become very popular in recent years, but the vast majority of traders receive lower returns than they would if they simply invested in a low-cost index fund. Why? Because it’s very hard.  As William Bernstein wrote in his book, The Four Pillars of Investing: “Trading individual stocks is like playing tennis against an invisible opponent; what the investor doesn’t realise is that he’s volleying with the Williams sisters.”

WB: Well, we tend to think of trading stocks, especially buying stocks as a sole activity. You know, kind of like ballet. You’re just out there performing. But in fact, it’s a one-on-one competition. And the analogy which you just referred to is it’s not just that you’re following against the Williams sisters, it’s that the Williams sisters on the other side of the net but you don’t know they’re on the other side of that.  You can’t see who’s on the other side of the net. You don’t know who you’re buying from when you buy a stop or who you’re selling to when you sell the store to. And so what you’ve not realized is the person on the other side of that net is not some, you know, idiot dentist from Peoria who doesn’t know what he’s doing.  The chances are that person has a name like Goldman Sachs or PIMCO or Warren Buffett or that’s not even the worst case scenario. The worst-case scenario is that you’re trading with the CFO of the corporation who knows more about that company than anybody else in the planet. You don’t want to be trading with any of those people.

RP: Most traders, in other words, are overconfident.. and that shouldn’t surprise us. Behavioural psychologists have repeatedly shown how human beings are naturally prone to overestimating their own abilities.

WB: We all think that we’re better drivers than we actually are.  At 80% of the population. They’re an above-average driver, which is a mathematical impossibility. And more generally, we all think that we’re better liked and better looking and more pleasing than we actually are.  And it’s just to be to have a lot of humility about all those things, and particularly to have a lot of humility about your ability to pick stocks or even for that matter, which to pick asset managers.

RP: As William Bernstein says, trading stocks is highly competitive.  Most of us would struggle to compete with the professionals on skill ok knowledge.  But the good news is, we don’t need to outsmart them at all.

WB: Finance isn’t a process or game in which the person with an IQ of 160, 170 wins. In fact, most of the time the person with the IQ of 170 doesn’t beat the the person with the IQ of 130. What the real way that you win the game is to have more discipline.

RP: In summary, be humble. You’re not Warren Buffett, and you’re highly unlikely to outperform through stockpicking or market timing.  But being patient and disciplined will give you a decisive edge.

Disclaimer — The information in this video does not constitute advice or a recommendation, and you should not make any investment decisions on the basis of it. If you do however require advice please do not hesitate to contact Bloomsbury Wealth.