Don’t Try to Beat the Market

I get upset whenever someone says they are going to “beat the market”. The market isn’t a video game. Outsmarting other people isn’t the goal.

Anyone who approaches the market with the intent of “beating” it has already lost. Sure, it’s possible to gain money on the stock market, and it is also possible to get more money than the next guy in the stock market. The same thing is true of gambling. Unless you view the market as merely a high-class casino, “beating the market” is one of the worst analogies.

If everyone lost all of their income, and you only lost half, would you be excited that you “beat the market”? What if you became rich by suckering everyone else out of their money? Is that something to be proud of? No, and those are two of the reasons why “beating the market” is a ridiculous goal.

The goal of investment in a market is to build value, period. If your goal is something else, you should get out, because you are not only likely to lose your shirt, you are likely to hurt others in the process.

The market is not a list of numbers, it is a list of companies. Buying a stock is not betting on a horse, it is investing in what a company does on a daily basis. The goal of an investment is to either (a) help capitalize an operation that you believe has future potential, or (b) provide early compensation for others who capitalized the operation earlier by purchasing for a fixed price a future revenue stream. If your goal is to just hang on until you find someone stupider than yourself to sell it to, then you are doing it wrong.

Now, by this notion, it might be that there are *no* companies worth investing in. That’s certainly a possibility. What then? I can see two clear choices: either (a) save your money (that’s what cash and precious metals are for), or (b) start your own company or help out someone who is not listed start theirs.

Your money has so much better uses than just to gamble it away. Instead, find a productive way to invest your money.

Our current economic debacle comes from having so many people focused on “playing the market” rather than actually creating value. Therefore, the gains are all fake. Because so many people “play the market” or “provide liquidity”, no one is “providing value”. This is what causes a market crash. Eventually, the market returns to the value. If no one is producing, then there is no value.

If value is being created, the actual numbers behind your wealth are much less important. Real capitalization is deflationary. Imagine this – let’s say you go to the store and buy 100 apples for $2 each. You now have $200 worth of apples, and you eat them all year. Now let’s say you buy an apple tree. Now you can, from now on, have $200 worth of apples without spending money. You might even wind up with enough to sell (which will lower the market price), or have such an abundance you give them away just to keep from having to clean them up!

All of these operations lower the value of your 100 apples. But do you care? Wouldn’t you rather have food in such abundance that you had to give it away rather than have to spend $200 each year? But for those who keep score with dollar signs, who want to do “better than you” rather than “well”, they would rather have apples become scarce, and their $200 worth of apples become worth $600. They would plow up an entire forest of apple trees to make their apples worth more. When they are starving in the street because they killed their own source of food, they will say, “I won – my assets are worth more dollars than anyone else’s”.

Which person in these stories was actually wealthier? The one with dollars, or the one with actual productive capital assets?

If you think you can successfully invest in the market, and in doing so improve the market itself, by all means be my guest. But if you want to play the market or beat the market, then for the good of yourself and others, please don’t.