So you want to “beat the stock market”?
Stock markets can be unpredictable, and the swings we’ve seen since the beginning of this year have taken this unpredictability to a new level. Can you take advantage of them to make money?
One point I make early on to my finance students each year about the stock market is this: When you buy or sell a stock, you’re not “playing against the house” like in a casino. You’re trading with another person-another investor-who thinks the opposite of you.
For example, you think the price of a stock is going to go up, so you buy. But you didn’t buy it from a “stock store.” Someone else just sold it to you… because they think it’s going to go down-or at least, not go up enough to be worth holding.
So the key question you have to ask yourself is, “What do you know that they don’t?” And more importantly, “Are you smarter than they are?”
Because on the other side of that trade might be a full-time professional investor with a team of analysts, access to expensive data, and years of experience.
This is why many finance professors-and even professional investors-choose to invest most of their own money in low-cost index funds and don’t try to beat the market. Index investing isn’t lazy or unsophisticated-it’s recognizing that consistent outperformance is rare, and avoiding high fees is one of the most reliable ways to grow your wealth.
Of course, not every trade is a battle of wits. Sometimes people sell for reasons unrelated to what they think the stock is worth-like needing cash for a house or rebalancing a portfolio. But on average, you’re still up against smart, well-informed investors.
The bottom line is, if you’re going to trade individual stocks, go in with humility. Keep in mind that the person you’re trading against might be a lot better at this than you are. And know that you’re not just making a bet-you’re making it against someone else who thinks you’re wrong.
Note: this is a lightly edited version of an Econ Quick Takes video.
Originally published at https://mytwocentsandcounting.substack.com.
