Can anyone consistently beat the index?

“I’m not happy with my broker and I’m not good at math,” says reader HT. What are the secrets of investing in gurus? Is it really possible to always beat the stock market? ”

In “Why do we invest poorly” (May 20, 2016), I quoted psychological research on why it is extremely difficult for people to always make the best decisions in the stock market. Like many people, I invest in stocks and other things, but ethics prevents me from recommending specific advisors.

You do not have to be a math genius, but study the basics like price-to-earnings ratios and research in detail about company performance. Getting rich is not easy and often due to luck rather than skill, so you can not just trust professionals and blame them when expectations are not met.

Bill Miller, who manages Legg Mason’s fund in the United States, was dubbed by Money Magazine as the “Greatest Money Manager of the 1990s.” Miller beat the S&P 500 index not just five or ten times, but for 15 consecutive years, from 1991 to 2005.

The chances that Miller (or a particular person) could do this are actually small, and this is where math comes in. We are not very rational; our emotions lead us astray when it comes to focusing on alleged winning streaks. So how do mathematicians view the problem?

“There are thousands of leaders and dozens of 15-year periods,” says HEC Paris professor Olivier Sibony in his book “You are making a terrible mistake!”

“If we assume that the markets are completely efficient … what is the probability that we will observe [Miller’s] result at least once for a manager over a period of 15 years? ”

The answer is astounding: 75 percent, says physicist Leonard Mlodinow in his book “Drunkard’s Walk.” Math says we should expect the existence of a Miller at all times!

While the odds are minimal that someone (like your broker) can consistently beat the index, chances are good that there is someone on this planet who does it at all times.

Miller knows this: “We have been lucky. Maybe it’s not 100 percent luck. Maybe 95 percent luck. ”

He performs due diligence, and some mathematicians know more about derivatives and their like (Fischer Black and Myron Scholes won the Nobel for modeling option awards).

But in the end, investing in the stock market for most of us mortals is often nothing more than what Burton Malkiel justified in his book half a century ago: “A Random Walk Down Wall Street.”

Manage your expectations. Even if you are not happy with your advisors, math predicts that they too will be successful.

Ask them to examine these and learn from them, in the same way that French commands debrief after successful slips.

“If the mission was successful only because of good luck, there can be a lot to learn from it – perhaps more than a few mistakes,” says Sibony. “When they discover that their success was largely a function of good luck rather than superior talent or strategic advantage, it is often too late.”

Do not be too emotionally attached to your decisions. Selling shares right away when the market crashes may not always be best, as it is often wise to stick with the long run.

But the opposite is also true: holding on when things are clearly not going to work out is also bad.

In 1983, General Motors (GM) created the Saturn division to compete against Japanese cars. Twenty years later, Saturn was already wasting more than $ 15 billion without much to show for it.

GM should have closed it. But in love with its original decision, it added another $ 3 billion to back it up. When the crisis hit in 2008, GM had to be rescued by the US government, and Saturn was finally shelved in 2010.

Follow my columnists in the Inquirer Business section as they write about investing, setting realistic expectations, talking openly with your financial advisors, diversifying your portfolio, checking mutual funds, using common sense and common sense, and you should do it respectfully.

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Queena N. Lee-Chua is on the board of the Ateneos Family Business Center. Get her printed book “All in the Family Business” via Lazada or the e-book version on Amazon, Google Play, Apple iBooks. Contact the author at [email protected]

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