Ep 23 - The 3 Reasons You’ll Never Beat the Market (And Why That’s Okay)

But let's say you are confident.

You believe your intuition is going to somehow outsmart this thing called the market.

You're competing with hedge funds that employ literal physicists, statisticians, and engineers who haven't seen sunlight since the Obama administration.

I hate to break it to you, but by the time you think you've caught the trend, the trend is already in a villa in Santorini sipping a Negroni and whispering, You're late.

Hello, friends.

This is Tyler Gardner welcoming you to another episode of your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing.

So let's get started and get you one step closer to where you need to be.

Today, my friends, we are going to explore nine reasons why you

and I

are never going to beat the stock market.

I have spent an embarrassing number of years studying this stuff.

Books, charts, spreadsheets, more books, like some kind of socially awkward monk whose sacred temple is a vanguard prospectus.

I'm not kidding.

I have invested personally and professionally, succeeded just enough to be dangerous.

failed just enough to be humble, and still, somehow, after all this time, I remain completely unequipped emotionally, intellectually, and possibly genetically, to outsmart this thing we call the stock market.

As some of you know, I live a pretty simple life with my wife in the woods of Vermont, where my primary advisors are two bloodhounds named Wallace and Dixie and a raccoon who keeps stealing my compost.

And even from this place of quiet reflection and deeply mediocre internet service, service, I can tell you with full confidence, the market is smarter than I am.

And once you understand what you're actually up against, and I mean really understand,

you'll probably realize the same is true for you.

And you won't waste the next 20 years of your life or mental energy trying to beat it.

So.

Let's start at the very beginning.

And let's ask the first question we should be asking, yet the one question almost no one ever asks.

Who the heck came up with this idea that we're supposed to beat the stock market?

It's like if I tell you the following.

Dear audience member 106, if you give me a hundred bucks, I'll give you $7

next year for doing absolutely nothing other than giving me your money.

And I would do that again and again and again in perpetuity.

And you don't need to do a dang thing.

And then it would be like you're instantly responding to me saying, you know what, Tyler?

Although that sounds pretty good, let's make it eight.

Or you know what?

Make it nine bucks and maybe I'm in.

It's actually absurd when you say it out loud.

But somewhere along the way, this idea of beating the stock market became not just a goal, but the goal, as if investing became a sport and your 401k is now in direct competition with the world's greatest hedge fund managers.

Where did that idea come from?

Well, allow me to tell you a little story called Where Exactly That Idea Came From.

Once upon a time, in the magical land of let's extract maximum fees from confused people,

Some very clever folks created a little thing called an index.

For this episode, we'll use the SP 500, a basic list of the 500 biggest companies in America.

It was supposed to be a barometer, a reference point, a way to check the financial weather.

But then, in classic human fashion, we turned this barometer into a scoreboard.

And suddenly, the only way to feel good about your money was to beat this index.

You didn't just want to experience growth alongside the US markets.

You wanted to beat the the crap out of the growth of the U.S.

markets.

And thus, my friends, a trillion-dollar guilt trip was born.

So if you take nothing else from today's episode, if I bore you to tears over the next 20 minutes talking about why specifically you won't beat the market, please just take this.

Why the flippity flop are you trying to beat the stock market?

Seriously, what are you trying to prove and to whom?

Because honestly, I'll bet you don't even know the answer to that question, nor do you remember the first time it dawned on you to want to beat the market.

You just feel like you're supposed to.

Like if your neighbor's portfolio goes up 12% and yours goes up only 9%, you've somehow lost, even though your portfolio still went up 9%.

Okay.

Now that that's out of the way, and you all should rest assured that beating the index isn't even a rational goal to begin with.

Beyond this existential weirdness of the entire setup, there's also a highly practical problem.

More often than not, the SP 500 is not even a fair comparison for most people's portfolios.

Unless you are invested 100% in U.S.

large cap stocks, that means no bonds, you have no cash, you have zero international exposure, you're not holding any real estate, and you don't even have an emergency fund.

Then the SMP is not even the right measuring stick for you.

I used to have clients ask on a regular basis if A, we were capable of beating the stock market as portfolio managers, and B, once they were working with us, well, why the heck weren't we beating the stock market?

And I would gently remind them, well, do you remember when you told me you hated hated volatility and you wanted to be able to sleep at night and you cried during that Vanguard commercial?

So we put you in a diversified 40-40-20 mix of stocks and bonds and real estate.

Yeah, that portfolio isn't designed to beat the SP.

That's literally the point.

And I say this lovingly, because many just don't know this.

If you have even $1 in cash on the sidelines, you can't compare yourself outright to a 100% stock benchmark.

But if you are dead set on beating the stock market, well, taking on less risk than a 100% stock portfolio, well, you don't need a financial advisor, you do need an education in why we use what are called benchmarks and what's fair to compare yourself to.

For my 1.0 listeners, if you really want to compare, let's just take that 40, 40, 40, 20 portfolio, if you want to compare it to something, as in the example above, we can't just use one benchmark because it reflects three types of asset classes.

We would use benchmarks that actually line up.

We might use the S ⁇ P 500 for your stock portion.

We might use AGG for your bonds.

And we might use VNQ for your real estate exposure.

These are just mites.

There are endless endless benchmarks that can reflect what the total return of an average type of asset class is for that given year.

Now, we're not going to do this because we're trying to win gold at the Personal Finance Olympics, but just to see if you're, you know, not driving off a cliff with your investments.

So we use it just as a barometer.

Because comparing your diversified retirement portfolio to the SP 500 is like comparing your weekly grocery bill to the price of saffron in Tehran.

They're only loosely related and only if you squint and ignore context and maybe only on Tuesdays during a solar eclipse.

But okay, let's play pretend for a minute.

Let's say you've passed my first two litmus tests of whether you have any business beating the SP.

You love the idea of beating the market.

You dream of it.

You light candles to it at night.

And you are, in fact, 100% in stocks.

You wake up every morning, you look in the mirror, and you say, you know what, I trust my gut.

Side note: never trust your gut.

Your gut is the same thing that told you to buy a Peloton, never use it, and then turn it into a towel rack.

Again, that might just be me.

But let's say you are confident.

You believe your intuition is going to somehow outsmart this thing called the market.

Well, let's take a quick moment to talk about who and what you're up against.

Some of this you've heard, and some of it you haven't.

First off, you're not competing with your brother-in-law, Doug, who bought Tesla at 40 bucks and now uses it as a personality trait.

You're competing with hedge funds that employ literal physicists, statisticians, and engineers who haven't seen sunlight since the Obama administration.

You're up against 25-year-olds who write machine learning algorithms before breakfast and spend their afternoons casually shaving milliseconds off trade times using fiber optic cables that run under the Atlantic Ocean.

You?

You're sitting on your couch in sweatpants, trading on Robin Hood, thinking you discovered something hot because a YouTube video with 900 views told you that AI is the future.

I hate to break it to you, but by the time you think you've caught the trend, the trend is already in a villa in Santorini, sipping a Negroni and whispering, you're late.

But this is only the beginning, the very beginning.

To understand just how stacked the deck is against you, we're going to take a brief and I promise, well, I hope, painless detour into something called market efficiency theory.

Don't worry, no charts, no Greek letters, just enough jargon for you to be able to impress your family at Thanksgiving when cousin Doug starts talking about his next big thing.

So, market efficiency is a spectrum.

It's basically how fast the market absorbs new information and reflects it in current prices.

On one hand, you've got what's called weak form efficiency.

This says that all the past data to which we have access, charts, price patterns, historical trends, it says all of that is already baked into current prices.

So So, if you're into technical analysis, aka reading candlestick charts like they're tea leaves, I'm sorry, but you're probably not seeing something others missed.

You're not early.

You're not special.

You're just the 9,437th person that week to circle a double bottom on a stock chart and scream, to the moon.

It's not going to work.

If technical analysis worked the way people on Reddit says it does, they'd all be rich and retired by now, not still posting memes at 2 a.m.

under usernames like Elon Musk42069.

Then we've got what's called semi-strong form efficiency.

This is where it gets even more brutal.

It says that all publicly available information, news articles, earnings reports, press releases, Jim Kramer yelling something on CNBC, is already priced into the stock, often within seconds.

So, when you read a headline like, Company X signs massive new contract, it's cute that you think you're early because you're reading the article over your morning coffee at 9 a.m.

Again, you're not.

More importantly, the people with real money, institutions with armies of computers and a complete absence of emotional baggage have already made the trades to reflect the news and immediately shift the prices to reflect said news.

You're not early.

You're not the exception.

You are standing outside in the cold, clutching a bottle of wine no one asked for while the hedge fund guys are already in their Ubers headed to the next party.

Drink your wine in the parking lot, go home, and then maybe open a target date index fund and tell yourself it will be okay.

Finally, we get to the big dog of market theory: strong form efficiency.

This is the idea that even insider information is already priced into the the prices we see in front of us.

Yes, even the stuff whispered about behind mahogany boardroom doors over overpriced Pinot Noir baked into the price like a secret ingredient you didn't ask for but still somehow paid a 2% fund fee to enjoy.

Now, strong form efficiency is, well, we'll call it aspirational.

It assumes that no one, not even the insideriest insider who is the CEO and also the janitor and also married to the Fed chair, can consistently gain an edge.

Now, if this were fully true, then insider trading wouldn't work.

And since the SEC still exists and still occasionally throws people in jail who look like they were born inside a Patagonia vest, we can safely say we're not quite at the level of capitalist clairvoyance.

And yes, this is the part where you can insert your favorite joke about Nancy Pelosi's portfolio or Trump coin or your cousin who swears Congress has a private investing Slack channel.

Don't worry, I throw elbows in all directions.

This podcast is an equal opportunity cynicism zone.

But for practical purposes, and I say this with love, if you're sitting at home reading earnings reports on your lunch break while microwaving last night's stir-fry, you're operating in a semi-strong world.

Every single piece of information you have access to, say it with me, Already priced in.

Now, let's continue to pretend once again that you, retail investor 24601,

you've decided you do want to beat the market, and you've somehow rationalized that absurdity to yourself.

You're comparing your performance to the appropriate markets, and let's say you somehow do manage to beat the institutional PhDs and the fiber optic sharks and the insider traders and the high-frequency robots built by Elon's lesser-known cousin, Greg Musk, you'd still have to face the single most dangerous player in the game.

Yourself.

I know you've heard this before, but the single most dangerous player is yourself, not the market.

You.

The real villain in this story isn't the economy.

It's your very own well-meaning but highly delusional brain.

Let's walk through what's holding you back from beating the market year over year over year.

First up, you are victim to overconfidence bias.

This is the one where you, a normal person with a Costco membership and a suspicious relationship with caffeine, convince yourself that you're smarter than the market because you made one right call out of 50 with your individual picks.

Here's a fun fact.

80% of people think they're above average drivers.

And in transparency, I am absolutely one of them.

Now, that's statistically impossible.

But because I once parallel parked a Subaru route back in Burlington, Vermont in one smooth motion, I now basically think I could moonlight for NASCAR.

Investing works the same way.

You make one good trade, one,

and suddenly you're Gordon Gecko with better morals and worse hair.

You start placing bigger, bolder bets based on nothing but vibes and your belief in your own financial clairvoyance.

Quick personal story time.

When COVID hit, I was peak confident, like strutting around my cabin in Vermont in socks and a robe level confident about my investing skills.

I decided that humanity was now permanently indoors and allergic to pants, so I went heavy on stocks like Chewy, DoorDash, and wait for it, Peloton.

And not just Peloton, I got in with Peloton at its IPO.

And because God occasionally smiles on fools and hermits alike, that stock happened to soar.

I rode that overpriced stationary bike stock all the way to 160, cashed out, and used it for a down payment on a house in Vermont.

It was my crowning financial achievement.

I timed both ends.

Do I talk about this all the time?

Yes.

Do I tell that story at dinner parties?

Absolutely.

Have I ever exaggerated the timing of my entry point by just to smidge to make it sound even cooler?

I am legally advised not to answer that.

Today, of course, as some of you might know, Peloton trades somewhere between a used kettleball and a promise.

But that doesn't stop me from telling everyone how brilliant I was and especially at the time for me to have thought that somehow I should be a portfolio manager, which ironically I became.

That, friends, is overconfidence bias, and I had no idea where Peloton would go, just that I happened to be lucky enough to go along for the ride.

Next up, we have recency bias.

This is where you assume that whatever just happened is definitely going to keep happening.

If the market goes up, you feel invincible.

If it goes down, you hoard cash and Tupperware and start googling Great Depression soup recipes.

Your brain is wired for this type of pattern recognition, even when there isn't a pattern.

You think you're making a logical call, but you're basically a squirrel planning next year's acorn strategy based on how many fell yesterday.

And then there's loss aversion.

This might be the most evil of them all.

And I've been writing about this one a lot recently.

Behavioral economists have shown that losing money feels about twice as painful as gaining the same amount feels good,

which means your portfolio could be doing totally fine overall.

But you'll fixate on that one red stock like it personally betrayed your family.

So what do you do?

You panic and you sell that one stock.

And of course, as you know, almost like clockwork, the market bounces back and that one stock soars the next year.

This is why trying to time the market often means you miss the recovery entirely.

Because the pain of losing $1,000 hurts way more than the joy of gaining $1,000 feels good, which is yet another reason humans should probably not be trusted with sharp objects, large sums of money, or investing apps after 10 p.m.

Now let's move to one of my personal favorites and reasons why you're not going to beat the stock market.

Confirmation bias.

This one's a beauty.

And as all of you should know, this extends well beyond investing.

This This is when you only seek out information that already happens to agree with you.

Oh, does that feel good?

And you quietly ignore the stuff that doesn't because you just pretend it's wrong.

Honestly, I think you know this.

This is how most people live their entire lives right now, and it's brutal.

We build our little intellectual echo chambers out of YouTube videos and blog posts and comments from Carl on Reddit, and then declare ourselves geniuses because you happen to find enough support for what you already believed.

Side note, when I used to be an English teacher and come across like really wonderful literary gems, I would say, this writing is amazing.

But upon further reflection, I realized that I only thought the writing was amazing because it usually was something I had already believed in.

Same is true in investing.

You pick a stock.

You watch 15 videos explaining why it's the next apple, and then you skip over the one from a guy with actual credentials saying it's a hot garbage on fire.

And don't think I'm above this, as I just said.

Want to know who loves my content?

People who invest exactly like I do.

Want to know who I don't listen to as much as I should?

People who tell me to mix things up who I don't agree with.

Why?

We all want to be affirmed in our thinking.

And that's too bad.

But in a perfect world, an intellectually honest, emotionally secure, beautifully rare kind of world, we'd all be out here seeking ideas that do challenge us, not to abandon what we believe, but to pressure test it, to ask, am I right or am I just comfortable?

Same goes for money.

So please, for the love of your future self, you should want to be proven wrong from time to time.

That's how you're going to grow.

And honestly, it'll make you a much better investor and a far less insufferable commenter on the the internet.

Next up, we have something called anchoring bias.

This is where your brain latches onto some arbitrary number and treats it like gospel, and it happens all the time in investing.

Say you bought Tesla at $600 and now it's trading at $590, but you refuse to sell because you're just waiting for it to bounce back to some arbitrary price point, $600.

Though it might only be worth $400.

Who knows?

Not you, because you will always believe $600 was somehow the right price, the sacred price that saved your dog from a burning building.

No, it's just a number, and a highly arbitrary one at that.

And yet your brain treats it like the North Star for all future decisions on that stock.

Same thing happens with the SP as a whole.

I hear people say things daily like, well, it was at 15,000 yesterday and now it's at 15,100.

Huh?

15,000?

What, you ding-dongs?

That number is meaningless out of context.

You might as well tell me your cholesterol level and expect me to understand what that even implies.

And don't even get me started on IPOs.

If you're going to play that game, at least wait six months when the insiders finally get to sell their shares.

That's when you start seeing actual price discovery, not hyped price helium balloons drifting into the stratosphere based on the investment banks, blah, blah, blah.

Look that up.

It's a fascinating topic.

Then we've got the endowment effect.

This is the one where you assume something is more valuable simply because you own it.

You argue passionately for stocks in your portfolio like they're your kids in a custody hearing.

Meanwhile, someone else brings up an objectively better option and you're like, no, thanks.

I'm good with this flaming trash can I've emotionally bonded with.

And now the classic herd mentality.

You do something because everyone else is doing it.

Come on, we grew up trying to be convinced not to do this.

And I wonder if there's a good example of something I could use here.

Well, I'll use a different one.

Remember in 2021, when millions of people convinced themselves that buying a dying video game retailer at 700 times earnings was a totally reasonable plan?

Yeah, GameStock to the moon, followed shortly by GameStop to bankruptcy court?

But sure, you can tell yourself it was about sticking it to Wall Street.

I promise they weren't that phased.

And finally, the crown jewel of poor decisions that you all know about, but I can't make an episode like this complete without mentioning it and trying to keep you from doing it.

Market timing.

The market drops, you panic, and you sell, thinking it's never going to bounce back.

The market recovers, but you continue to wait for a better entry point, or you just miss it all along.

Or a new president takes office and they're going to destroy the world as we know it.

The world's on fire.

It will never be the same.

The entry point you're looking for never comes.

There will always and forever be a reason not to invest, just as I will always and forever have an excuse not to go out and socialize with people.

Meanwhile, your cash is earning 0.5%

and the market is off joyriding with a 10% return without you.

And I'm stuck at home with no friends watching Love is Blind to see if I can predict who will wind up together and who simply is in it for the celebrity D listing.

And now that I've done my best, and that really is the best I've got, to convince you that trying to beat the market makes no sense nor is it possible over the long run, I'll close with some very cherry-picked and affirmation-biased data.

See, I'm proving my own point, and I told you we're all guilty of this stuff.

This is kind of cool.

According to Dalbar, in 2024, the S ⁇ P 500 returned about 25%.

The average retail investor, 16.5%.

Not because they picked bad funds, because they couldn't stop fiddling with a perfectly fine meal.

It's like watching someone burn a filet mignon because they kept flipping it over and over every 30 seconds just to check.

Leave the steak alone.

And this is the tragic comedy of trying to beat the market.

Even when you do end up winning in one given year, you usually still lose.

You outperform the index by 1%,

but then immediately trigger short-term cap gains taxes that wipe out your edge.

Or you take on three times the risk you were supposed to, you feel brilliant for six months, then you sell in a panic when your fund drops 14% overnight because you were in overly aggressive tech funds.

Here's the truth.

Tying the market, tying the market, just being the market on an annual basis is the most outstanding thing you could ever do to separate yourself from others.

It's not sold that way, it's not packaged that way, but I'm here to sell it that way and I'm here to package that way because it's true.

That's the whole point of index investing.

It's not sexy.

But if you leave it alone and let compound interest do its work without interfering or letting your brain take over, it works.

Think about it like running a marathon, but instead of focusing on your time, you just focus on finishing.

Because you know that 90% of other runners are going to trip on their shoelaces, take too many Instagram selfies along the way, or forget to hydrate at mile three and they'll crash at mile 20.

They'll get there, did not finish, and even if you end up crawling across that line, your time is irrelevant because you didn't fall victim to what so many people do.

All I want you to do is keep jogging.

Finally, yes, you can do this on your own.

I hope that is clear by now that I am a firm believer in your ability to manage this on your own.

Because when you're able to do that, you actually can tie the stock market because you don't have to deal with advisor fees.

But,

and this is a big but,

if those fees, and I'll even say in this one episode, even the 1% fee, if what you're paying keeps you from panicking, fiddling, and torching your future, then pay the dang fees.

Just make sure your advisor is not doing an equal amount of fiddling and torching your future.

Because guess what?

And this is what nobody ever talks about.

They're human too.

And if you think they're objective with your money, then please go revisit Wolf of Wall Street or Boiler Room to appreciate that they're human too, and most who go down that path have some confirmation bias issues of their own that they're working out weekly to the tune of $1,000 an hour therapy bills.

You don't need to be a genius.

You just need to buy the right ingredients, in this case, low-cost index funds that track global markets, and then leave them alone.

Investing success isn't about being the smartest, it never will be.

It's about being the most emotionally boring.

It's about surviving your own brain long enough for compounding to work its magic.

So if you remember nothing else from today's episode, other than what I told you to remember at the beginning, that it's arbitrary to want to beat the market in the first place, but you should remember this.

I will not touch what doesn't need to be touched.

I will automate what can be automated.

And I will not demand $11 when someone is generously handing me $10.

Because real wealth isn't built by winning.

It's built by not losing your dang mind.

Thanks for tuning in to your Money Guide on the Side.

If you enjoyed today's episode, be sure to visit my website at tylergardner.com for even more helpful resources and insights.

And if you are interested in receiving some quick and actionable guidance each week, don't forget to sign up for my weekly newsletter where each Sunday I share three actionable financial ideas to help you take control of your money and investments.

You can find the sign-up link on my website, tylergardner.com, or on any of my socials at SocialCapOfficial.

Until next time, I'm Tyler Gardner, your money guide on the side, and I truly hope this episode got you one step closer to where you need to be.