I recently read an article about institutional investors at large firms utilizing quant trading, AI, and proprietary software to process terabytes of data daily, and they only manage to outperform the market by about 50.7%.
Given that individual investors don’t have access to these tools, it seems they might depend more on luck for short-term gains.
What are your thoughts on this?
Scale matters institutions can’t use the same strategies as retail traders due to differences in size. It’s much easier for a retail trader managing a smaller account than for an institutional trader dealing with larger sums. Additionally, the goals of institutions and retail investors differ. Not everyone is focused on maximizing alpha.
There is not because at that time trading takes the place of investing. As a tiny investment, that is a losing game.
It depends on how you define “short term” and “investing.” A few years in an index fund can definitely be worthwhile if you have the risk tolerance. But are you actually referring to active trading?
Oh, I see you meant actively trading as an individual.
I like how William Bernstein describes short-term active trading. He compares it to a transaction between a buyer and seller where one party is likely making a better decision, at least in the short term. The problem is you don’t know who you’re up against it’s like playing an invisible tennis match, and the other player is probably more like Serena Williams than you. Short-term “investing” is mostly speculative, relying heavily on luck and factors beyond your control. It’s essentially gambling, as we see on WallStreetBets.
I think it’s easier for me to see short-term swings than long-term ones. Every business eventually goes bankrupt, although in the near term, it’s simple to see them prosper.
If you believe you can consistently beat institutions at their own game, you’re likely kidding yourself. They have access to all the information you have and then some. You might “outperform” the market by taking on more risk, but that won’t help much when the next crash or bear market hits.
Yes, that is what my post is all about.
Is there any use for individual short-term investment if institutional investors have access to all these tools but only beat the market and profit from 50.7% of trades? Everything depends on luck.
Profits from a 50.7% win rate can be enormous with careful risk management.
Essentially, this is how a roulette table is calculated by the casino.
Yes, the casino’s math. Not the gamblers.