We’ve all heard stories of investors consistently beating the market. There are books about them, conferences dedicated to them, and YouTube videos made about them. It’s no secret that there are investors who have been consistently beating the market for years. But what we don’t know is how they do it: What stocks are they investing in? How much risk are they taking?
The Legendary Investors
Warren Buffett, for example, has had an annualized return of 20.9 percent over 53 years. Fidelity’s Peter Lynch had a 29 percent return over thirteen years. And Yale’s David Swensen has paid back 13.5 percent over thirty-three years.”
They have phenomenal investment skills and have earned their title as some of the best investors in the world. But just because these guys can consistently beat the market doesn’t mean you or I can.
Is it possible to beat the market?
Yes, theoretically it’s possible to consistently beat the market (which usually returns around 8 percent after accounting for inflation), just as it’s possible for me to become a heavyweight boxing champion. Statistically, with millions of people around the world trying to beat the market, there are bound to be some extreme outliers. Who knows if their success is due to statistics or skill? But even the experts themselves agree that individual investors shouldn’t expect to match their returns. Swensen, for example, has stated that he gets outsized returns because of top-notch professional resources, but more importantly, access to investments you and I will never have — like the very best venture capital and hedge funds he uses to bolster his asset allocation. These professionals spend every waking hour studying investments and have access to proprietary information and deals. Mom and Pop investors have no chance to compete with them.
Survivorship bias and financial ratings
Financial firms are well aware of survivorship bias, but they care more about having a page full of funds with great performance numbers than unveiling the whole truth. Because of this, they have deliberately created multiple ways to quickly test funds and market only the best performing ones, maintaining their reputation as the “best” funds brand.
These tricks are particularly insidious because you would never know to look out for them. Of course, when you see a page full of mutual funds with 15 percent returns, you assume that they will continue to give you 15 percent returns in the future. And it’s even better when they have five-star ratings from a trusted company like Morningstar. But now that we know about survivorship bias and the fact that most ratings are meaningless, it’s easy to see that financial experts and companies are just trying to fat their wallets, not ensuring you’re getting the best return on your investment To recieve money.
How to live your rich life
While some people are excited by the idea of accumulating wealth, either through saving or investing, most of us pursue wealth-building strategies as a means to an end. Ultimately, our goal is to live an abundant life, however we define it.
For some people, living richly means following certain conventions—buying big houses, driving expensive sports cars, buying a wardrobe to die for, and taking regular five-star vacations—while for others these pitfalls of rich living have nothing to do with it the life of the rich life. Rather, for them, an abundant life means having enough financial security to maximize their enjoyment of the activities, things, and relationships they value most.
As you continue to build wealth and discover what living a rich life means to you, I Will Teach You to Be Rich offers numerous free resources to give you the know-how you need to move forward in your journey.