3 Reasons You’ll Never Beat the Stock Market

Tyler Gardner (0:00)

Well, let's say you are confident. You believe your intuition is going to somehow outsmart this thing called the market. You're competing with hedge funds that employ literal physicists, statisticians, and engineers who haven't seen sunlight since the Obama administration. I hate to break it to you, but by the time you think you've caught the trend, the trend is already in a villa in Santorini, sipping a Negroni and whispering, You're late. Hello friends, this is Tyler Gardner welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing. So let's get started and get you one step closer to where you need to be.

Today, my friends, we are going to explore nine reasons why you and I are never going to beat the stock market. I have spent an embarrassing number of years studying this stuff. Books, charts, spreadsheets, more books, like some kind of socially awkward monk whose sacred temple is a vanguard prospectus. I'm not kidding. I have invested personally and professionally, succeeded just enough to be dangerous, failed just enough to be humble, and still somehow after all this time, I remain completely unequipped, emotionally, intellectually, and possibly genetically, to outsmart this thing we call the stock market. As some of you know, I live a pretty simple life with my wife in the woods of Vermont, where my primary advisors are two bloodhounds named Wallace and Dixie and a raccoon who keeps stealing my compost. And even from this place of quiet reflection and deeply mediocre internet service, I can tell you with full confidence the market is smarter than I am. And once you understand what you're actually up against, and I mean really understand, you'll probably realize the same is true for you. And you won't waste the next 20 years of your life or mental energy trying to beat it. So, let's start at the very beginning. And let's ask the first question we should be asking, yet the one question almost no one ever asks. Who the heck came up with this idea that we're supposed to beat the stock market? It's like if I tell you the following, Dear Audience Member 106, if you give me a hundred bucks, I'll give you seven dollars next year for doing absolutely nothing other than giving me your money. And I would do that again and again and again in perpetuity. And you don't need to do a dang thing. And then it would be like you're instantly responding to me, saying, you know what, Tyler? Although that sounds pretty good, let's make it eight. Or you know what? Make it nine bucks, and maybe I'm in. It's actually absurd when you say it out loud, but somewhere along the way, this idea of beating the stock market became not just a goal, but THE goal, as if investing became a sport, and your 401k is now in direct competition with the world's greatest hedge fund managers. Where did that idea come from? Well, allow me to tell you a little story called Where Exactly That Idea Came From. Once upon a time, in the magical land of Let's Extract Maximum Fees from Confused People, some very clever folks created a little thing called an index. For this episode, we'll use the S&P 500, a basic list of the 500 biggest companies in America. It was supposed to be a barometer, a reference point, a way to check the financial weather. But then, in classic human fashion, we turned this barometer into a scoreboard. And suddenly, the only way to feel good about your money was to beat this index. You didn't just want to experience growth alongside the US markets. You wanted to beat the crap out of the growth of the US markets. And thus, my friends, a trillion dollar guilt trip was born. So if you take nothing else from today's episode, if I bore you to tears over the next 20 minutes talking about why specifically you won't beat the market, please just take this. Why the flippity flop are you trying to beat the stock market? Seriously, what are you trying to prove and to whom? Because honestly, I'll bet you don't even know the answer to that question, nor do you remember the first time it dawned on you to want to beat the market. You just feel like you're supposed to. Like if your neighbor's portfolio goes up 12% and yours goes up only 9%, you've somehow lost, even though your portfolio still went up 9%.

Okay, now that that's out of the way, and you all should rest assured that beating the index isn't even a rational goal to begin with, beyond this existential weirdness of the entire setup, there's also a highly practical problem. More often than not, the S&P 500 is not even a fair comparison for most people's portfolios. Unless you are invested 100% in US large cap stocks, that means no bonds, you have no cash, you have zero international exposure, you're not holding any real estate, and you don't even have an emergency fund, then the S&P is not even the right measuring stick for you. I used to have clients ask on a regular basis, if A, we were capable of beating the stock market as portfolio managers, and B, once they were working with us, well, why the heck weren't we beating the stock market? And I would gently remind them, well, do you remember when you told me you hated volatility, and you wanted to be able to sleep at night, and you cried during that Vanguard commercial? So, we put you in a diversified 40-40-20 mix of stocks and bonds and real estate. Yeah, that portfolio isn't designed to beat the S&P. That's literally the point. And I say this lovingly, because many just don't know this. If you have even one dollar in cash on the sidelines, you can't compare yourself outright to a 100% stock benchmark. But if you are dead set on beating the stock market while taking on less risk than a 100% stock portfolio, well, you don't need a financial advisor. You do need an education in why we use what are called benchmarks and what's fair to compare yourself to. For my 1 listeners, if you really want to compare, let's just take that 40-40-20 portfolio, if you want to compare it to something, as in the example above, we can't just use one benchmark because it reflects three types of asset classes. We would use benchmarks that actually line up. We might use the S&P 500 for your stock portion. We might use AGG for your bonds, and we might use V&Q for your real estate exposure. These are just mites. There are endless benchmarks that can reflect what the total return of an average type of asset class is for that given year. Now, we're not going to do this because we're trying to win gold at the personal finance Olympics, but just to see if you're, you know, not driving off a cliff with your investments. So we use it just as a barometer. Because comparing your diversified retirement portfolio to the S&P 500 is like comparing your weekly grocery bill to the price of saffron in Tehran. They're only loosely related, and only if you squint and ignore context and maybe only on Tuesdays during a solar eclipse. But okay, let's play pretend for a minute. Let's say you've passed my first two litmus tests of whether you have any business beating the S&P. You love the idea of beating the market, you dream of it, you like candles to it at night, and you are, in fact, 100% in stocks. You wake up every morning, you look in the mirror, and you say, you know what? I trust my gut. Side note, never trust your gut. Your gut is the same thing that told you to buy a Peloton, never use it, and then turn it into a towel rack. Again, that might just be me. But let's say you are confident. You believe your intuition is going to somehow outsmart this thing called the market. Well, let's take a quick moment to talk about who and what you are up against. Some of this you have heard, and some of it you haven't. First off, you are not competing with your brother-in-law Doug, who bought Tesla at 40 bucks and now uses it as a personality trait. You are competing with hedge funds that employ literal physicists, statisticians, and engineers who haven't seen sunlight since the Obama administration. You are up against 25-year-olds who write machine learning algorithms before breakfast and spend their afternoons casually shaving milliseconds off trade times using fiber optic cables that run under the Atlantic Ocean. You? You are sitting on your couch in sweatpants, trading on Robinhood, thinking you discovered something hot because a YouTube video with 900 views told you that AI is the future. I hate to break it to you, but by the time you think you've caught the trend, the trend is already in a villa in Santorini, sipping a Negroni and whispering, you're late. But this is only the beginning, the very beginning. To understand just how stacked the deck is against you, we're going to take a brief, and I promise, well, I hope, painless detour into something called market efficiency theory. Don't worry, no charts, no Greek letters, just enough jargon for you to be able to impress your family at Thanksgiving when cousin Doug starts talking about his next big thing. So market efficiency is a spectrum. It's basically how fast the market absorbs new information and reflects it in current prices. On one hand, you've got what's called weak form efficiency. This says that all the past data to which we have access, charts, price patterns, historical trends. It says all of that is already baked in to current prices. So if you're into technical analysis, aka reading candlestick charts like they're tea leaves, I'm sorry, but you're probably not seeing something others missed. You're not early. You're not special. You're just the 9,437th person that week to circle a double bottom on a stock chart and scream, to the moon! It's not going to work. If technical analysis worked the way people on Reddit says it does, they'd all be rich and retired by now, not still posting memes at 2 a.m. under usernames like Elon Musk 42069