Monday, October 26, 2009

Why is Investing Different from Other Endeavours?

I’ve argued in the past that trying to time the market is a near impossible game for most of us to win over the long term. This prompted the question “why should we bother trying to do anything like becoming a doctor or a lawyer – there will always be someone else who is better.”

It’s certainly true that we can’t reasonably expect to be the very best doctor, lawyer, programmer, or poker player in the world. However, doctors don’t have to compete against every other doctor in the world. It might be tough if the world’s best doctor has the office next door, but under typical circumstances, a doctor merely needs to be in the middling range among his peers to run a successful practice.

In the case of a poker player, he just needs to find a game where he is an above average player. The fact that better players exist in the world is of no concern if they aren’t seated at the table.

However, when it comes to market timing, you can’t choose your opponent. Equity trading is essentially a world-wide game where everyone must compete against the very best players all the time. When trying to decide whether now is a good time to jump in or out of the market, an army of professionals with much better access to relevant information than the typical trader are competing in the same game.

3 comments:

  1. Really poor analogy. By your example a "middling" investor has a satisfactory portfolio. I think the problem is unlike the professions you mentioned, equity traders ONLY compare themselves to the top performers, rather than to their best abilities or their cohort. If the average GP shouldn't compare themselves to the best surgeons, why should traders?

    DAvid

    ReplyDelete
  2. DAvid: I find your comment puzzling. I don't think that a middling investor has a satisfactory portfolio. A satisfactory portfolio is a buy-and-hold mix of low-cost indexes. A large majority of investors and traders lose to this brainless strategy.

    I said nothing about who doctors and traders _should_ compare themselves to. I'm talking about who they _are_ competing with. Any time a trader makes a trade, he is in a game with people all over the world whether he likes it or not. He is competing against the best all the time. The very best doctors can only treat so many patients. When it comes to making a living, other doctors needn't worry about how they compare to the best doctors.

    ReplyDelete
  3. A lawyer analogy may have been better. A lawyer only has to beat 1 or 2 opposing counsel and not the entire worldwide bar.

    I have often wondered if there should be a variation on the don't market time advice. Market timing actually counts if you are buying penny stocks or other highly speculative ventures where prices vary greatly.

    But it raises the larger question of why a retail investor actually is buying this type of product. As you indicate, its not so much timing per se but what strategy one is chasing. Market timing is a much smaller problem compared to the larger issue of having no strategy or an unreasonable one for an average retail investor.

    ReplyDelete