who are the stock market winners?

in the US

The case for passive investing in the US, that is, buying an index fund rather than one “actively” managed is simple.  It has two parts:

–it takes a lot of time and effort to find an active manager and monitor his/her activities, and

–active managers generally do worse–sometimes, a lot worse–than the benchmark index they use to measure their performance.


The record outside the US is less clear, because complete data are less available.  My experience is that foreigners generally beat the Tokyo market consistently, at the expense of a woeful set of domestic investors.  I’ve always found the UK very difficult.  Beyond these two, it’s hard to know even how to group markets together, since the rest are rest are very small and sometimes have an industry–or even a single stock–that makes up 25% – 50% of the total capitalization.

So let’s stick with the US for thi dicussion.  And let’s talk about performance before managers collect their fees.

the players

hedge funds

Only the better-performing hedge funds make their records public.  Academic studies strongly suggest that some reported results are doctored to make them look better.  Despite these “enhancements,” hedge funds in the aggregate have pretty steadily underperformed the S&P for over a decade.  …and that’s before the 2/20.  The worst.

traditional institutional investors

Here the record is much longer.  The data are dependable and readily available.  They show that simply matching the S&P 500 puts a manager way up in the top half of the pack.  Managers, whether of pension money or of mutual funds, consistently underperform the S&P, though by a smaller margin than hedge funds.

the invisible players ( = the winners)

The large amount of money that the easily identifiable “professional” players lose relative to the S&P has to go somewhere.  It doesn’t just disappear.  It has to show up as gains for someone. There are three groups of possible aggregate winners:

–middlemen, meaning professional brokerage market makers and the trading rooms of institutional investors.  Again, no complete or reliable records.  My experience is that although the overall numbers are large, the cost of trading for an institutional money manager is around 0.2% of the assets under management and that a good trading room can make half of that back in trading profits.  Middlemen are not the main winners.

brokerage proprietary trading desks, meaning traders who use a broker’s own capital/information network to earn a return.  No complete or reliable records.  My sense is that these groups tend to trumpet their gains and bury their losses, so it’s difficult to get a read.  We do know that many of the best of these have formed hedge funds–which have, by and large, gone down in relative flames with the rest of the hedge fund industry.  Dodd-Frank is forcing these trading desks to close, so we’ll see for sure in the coming years.  But my guess is that they’re not big enough, either, to be the home of all the professionals’ losses.

private individuals.  Crazy as it may sound, other than company stock buybacks, you and I are the only group left.  We’ve eliminated all the other possibilities, so “whatever remains, however improbable, must be the truth,”  

I don’t mean it’s every you and me.  I think the winning you-and-mes fall into two categories:  regular people who hold a few stocks that they know well for long periods, and professional individuals or groups who manage their own money for a living and don’t seek publicity (if they’re successful, they’d have to be crazy to make their methods publicly known).

The bottom line:  achieving investment success for you and me isn’t effortless, but it’s possible.  In fact, if I’m correct, we’re the only ones who are able to do it.





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