It doesn’t suggest that. Factually, we know that a majority of investors underperform indexes.
Absolutely, I mean that when you break out the causes of the underperformance, you can see how much is from spending time out of the market, from paying high fees, from excessive trading to pay spreads and capital gains taxes repeatedly, from retail investors not starting with all their future earnings invested (e.g. often a huge factor in the Dalbar studies commonly cited to sell high fee mutual funds to retail investors), and how much from unwittingly identifying overpriced securities and buying them. And the last chunk is small relative to the rest.
When there’s an event that will cause retail investors to predictively make bad investments some hedge fund will do high frequency trades as soon the event becomes known to be able to trade the opposite site of the trade.
I agree, active investors correcting retail investors can earn normal profits on the EMH, and certainly market makers get spreads. But competition is strong, and spreads have been shrinking, so that’s much less damaging than identifying seriously overpriced stocks and buying them.
Active investors need to spend money to hire analysts, build computer models and high-frequency trading computers.
Let’s say it costs $10 dollar/per trade to do the analysis to be able to do a trade with a retail investor that nets the hedge fund $10.10. Even when there’s no strong competition with other hedge funds over that $0.10 of profit, the retail investor is still screwed by a significant $10.10.
Absolutely, I mean that when you break out the causes of the underperformance, you can see how much is from spending time out of the market, from paying high fees, from excessive trading to pay spreads and capital gains taxes repeatedly, from retail investors not starting with all their future earnings invested (e.g. often a huge factor in the Dalbar studies commonly cited to sell high fee mutual funds to retail investors), and how much from unwittingly identifying overpriced securities and buying them. And the last chunk is small relative to the rest.
I agree, active investors correcting retail investors can earn normal profits on the EMH, and certainly market makers get spreads. But competition is strong, and spreads have been shrinking, so that’s much less damaging than identifying seriously overpriced stocks and buying them.
Active investors need to spend money to hire analysts, build computer models and high-frequency trading computers.
Let’s say it costs $10 dollar/per trade to do the analysis to be able to do a trade with a retail investor that nets the hedge fund $10.10. Even when there’s no strong competition with other hedge funds over that $0.10 of profit, the retail investor is still screwed by a significant $10.10.