How to outperform 80% of all the Hedge Fund Managers on Wall Street

-

The Truth about Hedge Fund Managers and Wall Street

The financial services industry is built on two forces: greed and fear. On one hand, its not surprising to see people appear to make millions overnight with a series of smart trades.  There's always that one guy at work who brags about how he made a killing because he got into Tesla or Google or something early on and made 10x on his investment. The appeal is understandable-- it seems easy, and in hindsight, you should have known better.


I'm so confused
On the other hand, doing any kind of rudimentary research will get you lost in sea of crazy technical jargon and charts with squiggly lines. The price is going up, that's good right? The trend is your friend. Or wait, what about the whole "buy low, sell high" deal? So if the price is going down, that's also good? This is where the fear sets in. Instead of jumping in, you may go to one of the big investment banks where they can explain all of this to you. No need to concern yourself with simple moving averages, relative strength indexes, alpha or beta numbers now. These guys went to school for this kind of stuff. They spend all week crunching all these crazy numbers. They are professionals. Or are they?



The truth of the matter is most of these investment houses make more money off of *you* moreso than off the stock market. The typical hedge fund manager charges 2% "asset management fee". If he makes money for you, he takes an additional 20% off the top. If he loses money, then its because of market volatility and he still takes the 2% management fee anyways. Its an unfair game and its only going to get um... unfairer.

This system would be all well and good and I wouldn't complain one bit if the hedge funds and mutual funds actually made money for you. But in reality,  most hedge fund managers and mutual funds fail to even match the market, let alone beat it.

To put it in another way, if you had the names of all the 500 stocks in the S&P 500 listed on a wall, and you had a trained monkey choose 40 different stocks by throwing a 40 darts at the wall, those 40 stocks would track the S&P 500 index by within 3 percentage points. That means that a trained monkey will outperform a typical hedge fund manager, and that's before accounting for fees!

It helps if the monkey was trained at Columbia

So what exactly are you paying for with these hedge fund managers? You're paying them to potentially get you market crushing returns and but to also give you peace of mind as they handle all the crazy fluctuations. Again, greed and fear.

The House Always Wins



The most effective strategy that requires the minimum of work is to simply invest on the whole market.Take the greed and fear out of the equation. Regularly make a contribution to your 401(k), IRA, or equivalent every month and don't think too much about it. Obviously there will be recessions and dips, but if you have the mindset of making a decade-long investment, then time has a way of smoothing out all those squiggly lines. In fact, if you take a long term approach and adjust for inflation, the S&P 500 will give you an average annualized return of about 7%.

There exist index funds, such as the Vanguard S&P 500 Fund that charge miniscule expenses in order to take care of overhead. Their sole job is to track the holdings of the S and P 500 index. There's no hedge fund calling the shots, no trained monkey. Its simply a fund that tracks all 500 companies in the S&P 500. 

In addition to minimal expenses ratios and waived commissions, many of these funds will also let you invest as little as 100 dollars at a time (some even 1 dollar at a time!).

Using The most powerful Second Most Powerful Force on Earth to your Advantage

you don't need no credit card to ride this train
This strategy works because we're effectively investing in the US Economy. And as we ride the US Economy, we're also letting the second most powerful force on earth, compound interest, do all the heavy lifting. In fact, if you you have the long term in mind (you don't expect to take out any of the money for 10+ years), you should actually be rooting for the stock market to languish for the next 5 years or so.


Stocks are on sale!
The reason is that the actual underlying value of all businesses aren't any less valuable when the market dips. Its almost like housing-- if you see a house on sale at 150,000 dollars and then after a few years, it goes down to 100,000 dollars, its not like the inherent *value* of the house went down by 33%. A house is a house. The house priced at $100,000 will have the same exact number of rooms and such as when it was priced at $150,000. You're just getting more value for what you pay if you can snatch it up at the lower price. Remember, price is what you pay, value is what you get.



Likewise, the stock market is the same way. When the market corrects and takes a nosedive, think of it as everything being on sale. And while the prices are depressed, the rate of return of the stock market actually increases. In fact, those who kept regularly investing money during the great recession have been enjoying a rate of return north of 13% for the past 6 years. The reason simply being that everything was 50% off during 2009 and just now, in 2015, everything has pretty much returned to its normal prices.

Sticking to the System

Don't be fooled. These fund managers will use greed and fear in order to rope you into their actively manged funds. And while you're in the system they will bleed you dry with their exorbitant management fees. By simply sticking to the simple system and investing in the "house" as opposed to trying to beat it, then you will out perform most of these hedge fund shysters. Because, math.


Further Reading:
Invest like Warren Buffett: Buy and Hold
Dollar Cost Averaging
S&P 500 Return Calculator
88% Of Hedge Funds, 65% Of Mutual Funds Underperform Market In 2012





Popular posts from this blog

My Summer Training Block Part 1: Starting off with a fresh PR

-
    Hi everyone! Its been a minute. Work has been slow so I've been spending much of the summer running. The summer is going to come and go anyways, so might as well spend it building up a massive aerobic base šŸ˜Ž In the interest of not being too long winded, I'll break this into parts. I've been meaning to post something about my Half Marathon anyways, so I'll start with a race report about the Foot Traffic Flat on July 4th.   My Training :    I didn't have any particular training for this race. I wanted to start incorporating track work , specifically 400m repeats when I can . Its summer but I guess the kids at the high school still do practice for sports on the field . If the track is being used , then I end up going the "Kofuzi " workout , which is 6x1 mile repeats with about 90 seconds of rest . (Kofuzi is this guy ) I wanted to train some speed in before I started slogging through marathon pace work .     Outside of the 400 m repeats or the 1 mi...
Read more

Stumptown 50K Race Report

-
Image
  Coming off the back of the Vernonia Marathon and a solid performance in the Lake Oswego 10k, I approached this race as a “B” level event, meaning that I took it seriously, but I didn't put in a full 18 training block in the same way I treated Vernonia. Here’s a detailed account of my preparation, race day strategy, and the lessons I learned along the way. Training and Preparation In the six weeks leading up to the race, I maintained a steady training regimen, peaking at around 40 miles before tapering down. My taper wasn’t as restful as it could have been; I prioritized keeping my legs active rather than taking extended rest periods. One crucial aspect of my preparation was stretching. After attending a stretch lab demo, I learned my hamstrings and hips were particularly tight, which is common for runners. With a week to go, I integrated nightly hamstring and calf stretches to address potential knee pain, a recurring issue for me. Race Kit My race kit was assembled with comfort a...
Read more

The Brugada Challenge

-
Image
How the Concert Started How My Evening Ended I wanted to write something clever for this blog post, but I think the pictures do a good enough job getting your attention. Here’s how i ended up in the hospital. I had collapsed in the middle of June at a Death Cab for Cutie concert. When the medics checked me out, they noticed an irregular heart rhythm suggesting that a heart attack was imminent.  An ambulance came and a second set of EMTs performed another EKG. Since it was at a concert venue, they thought maybe interference from the music or the instruments was skewing the measurements. I t wasn’t. The second EKG confirmed the irregular heart rhythm so they treated me as if I was at risk for a cardiac event. It was puzzling for them because I was an otherwise healthy middle aged man. How could I be at risk for a cardiac event? My evening went from “ Death Cab for Cutie ” to “ Really Expensive Cab to Hospital ”  Upon arrival at the ER they perform a third EKG, which was no diffe...
Read more