STREET DOGS

The hardest thing for active investors to accept is that attempting to beat the market is futile

“It’s kind of crazy when you think about it,” say Wesley Gray and Tobias Carlisle in their book, Quantitative Value.

“We had hoped that having tested every model and approach under the sun we would be able to triumphantly announce that we had identified a way to reliably predict the market using fancy algorithms derived from hundreds of academic researchers.

“But it just wasn’t the case. We’ve built these models: they aren’t reliable; they aren’t robust; and they are littered with datamining. A large swath of the financial services industry would love to have you believe in their magic. We’re here to tell you that it doesn’t exist. Sorry.”

“This message [that attempting to beat the market is futile] can never be sold on Wall Street, because it is in effect telling stock analysts to drop dead,” says Nobel laureate Paul Samuelson. “And even if this advice to drop dead is good advice, it obviously is not counsel that will be eagerly followed. Besides, perhaps there really are managers who can outperform the market consistently — logic would suggest that they exist.”

The more likely scenario, however, is that only four types of people make a pile of money on the stock market. People who hold forever. Warren Buffett, Bill Gates et al. People who hold for onetrillionth of a second. The highfrequency traders who slip in the middle, sell a 10th of a cent higher and make a sliver of money, hundreds of times a day. People with inside information. It’s not legal but it’s the only way most fund managers can get an edge on their peers. People who take fees. In which case it doesn’t matter if you win or lose.