October 22, 2015

Mission Impossible: beating the market over long periods of time

We all hear about quantitative strategies that are supposed to earn us 20%, 25%, or even 30%+ returns over long periods by simply “maintaining discipline to the strategy.”

This is possible with small capital but as the capital increases and the number of years increases, it becomes more and more difficult to consistently earn higher returns.

  • Earning 20%+ returns over very long horizons is for all intent and purposes virtually IMPOSSIBLE (assuming the market experience of the past ~90 years is representative of the future).
  • 31.5%+ returns over the 1926 to 2010 period imply that an investor will end up owning over half of the ENTIRE stock market.
  • 33%+ returns imply that an investor will end up owning the ENTIRE STOCK MARKET!
  • A 40% return will have you owning the entire stock market in ~60 years–not a bad retirement plan!
  • A “doable” 21.5% a year implies an investor will own .62241% of the market at the end of 2010. With a $16.4 trillion total market value as of December 31, 2010, this would imply a personal stock portfolio worth $102 billion!!!
  • Warren Buffett–and perhaps a very select handful of others–have been able to achieve 20%+ returns over very long time periods. These individuals represent some of the richest people on the planet because of this very phenomenon.
  • An investor might have an epic run of 20% returns for 5, 10, maybe even 15, or 20 years, but as an investor’s capital base grows exponentially, the capital base slowly becomes ALL capital, and all capital cannot outperform itself!

No comments:

Post a Comment