The Three Ways to Beat the Market (And Why Most Investors Don't)

Pat Collins and Marcus Schafer discuss using evidence to inform your investment philosophy and why it’s important to have one. We dive into the three ways to beat the market, the evidence evaluating if those attempts are successful, and the three things investors can control to maximize their chances of success.

 

Chapters

00:00 Intro – The difference between the evidence of investing and the act of selling investments.

03:01 Why We Invest – Having your money work as hard as you do to live your ideal life.

05:50 Markets Work¹ – The evidence overwhelmingly suggests following an approach where the price is the best estimate of value.

10:15 The Three Sources of Alpha²– Nobel Laureate Robert Merton’s framework for the three ways to beat the market.

11:43 Skill vs. Luck in Investing³,⁴ – Skill is repeatable, luck is not.

15:11 Risk Factors – Not all investments have the same expected return.

20:18 The Three Reasons Why Active Managers Underperform – Costs, risks, and taxes.

21:29 Costs Matter – How explicit and implicit costs are connected to performance.

30:07 Risks Matter – Diversification is the only free lunch in investing.

36:29 Taxes Matter⁵ – One of Wall Street’s hidden secrets is reporting pre-tax performance when investors care about after-tax wealth.

41:27 Decisions and Outcomes – The importance of focusing on making good investment decisions based on the knowledge at the time, not the outcomes.

48:39 The Golden Age of Investing – The traits that make great investors might surprise you.

 

Sources

¹ SPIVA – an annual study of active managers that finds 90%+ of US funds underperform the benchmark over 20+ years.

² Robert Merton’s Three Sources of Alpha – traditional and information advantage, risk dimensions, and financial services alpha.

³ Morgan Housel’s Same as Ever – the power of being an average investor for an above average time.

⁴ Dimensional’s Fund Landscape Report – the challenge of persistence and other factors driving active management underperformance.
⁵ SPIVA After-Tax Scorecard – tax inefficient investments are estimated to cost investors 1-2% per year, but the industry often reports pre-tax performance that doesn’t show this.

 

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.