“Fallacies do not cease to be fallacies because they become fashions.”
― G.K. Chesterton
I am naturally a cantankerous person. I am trying not to be, but like so many attempts at self-improvement, results are hard-won and frequently ephemeral. In college, I had a particular friend who would take the the other side of any proposition I put forward. He was more knowledgeable and articulate than me on almost every topic, which was endlessly frustrating. Most of the exchanges we had ended with me conceding whatever point I was trying to make, simply to stop the embarrassment he was inflicting. There was one idea however, that I would never let go of, regardless of how violent my buddy’s verbal barrage became:
Anyone can understand the marketplace and everyone should be involved to some degree.
If you come across this post you are probably connected to the financial world to some degree and can already see where this is headed. My opponent would lay out the sentiment you have all heard before:
"The people on the other side of the trade are the smartest people in the world."
"The market is too complicated for people to do it themselves."
"You have algorithms doing things people couldn't dream of competing against."
You get the idea. Hedge funds represented everything smart in this world and the idea you, yes you, could do what they do to any degree of success was a laughable opinion.
And then, as it always does, hubris met nemesis.
Hedge Funds Should be Thriving Right Now. They Aren’t.
Hedge Fund Managers Don’t Always Beat the Market, but They Still Make Billions
Hedge Funds are on the Way to a Bad 10 - Year Streak
Oops. But alas:
“Demand for hedge funds is rising as investors such as endowments and pensions search for market-beating returns and diversification, a JPMorgan Chase & Co. survey found. About a third of respondents plan to boost allocations, up from 15 percent in 2018. Just 13 percent expect a decrease while 55 percent said they plan to maintain current allocations.”
I included the G.K. Chesterton quote at the beginning of this post because people have accepted the ‘fashion’ of smart money without grappling with the ‘fallacy’ that it isn’t all that smart. Yes, hedge funds employ some of the smartest people in the world. Yes, the market is complicated. Yes, quantitative algorithms can do things we can only comprehend at a basic level. But all of that hasn’t beaten a Vanguard index fund.
Hedge funds disguise their machinations with fancy lingo and high-minded equations but at the end of the day it’s a facade to keep you from the ultimate truth. The truth that you can succeed on your own. It’s not easy, in fact, it may be the hardest thing you ever do. You will stumble, surely fail at first, but you can do it.
Ben Carlson wrote a piece titled Inequality in the Stock Market that lit a fire under my ass. The theme of the piece is how exclusive investing in the market is. After breaking down the demographics of who and who isn’t invested in stocks Ben finished with, “Unless we make it easier, or mandatory, for people to save and invest in the stock market, wealth inequality will continue to worsen.”
I do not look to hedge funds solve this issue. Instead, I look at the people too intimidated to invest on their own and tell them that they can do it.
Of course a demographic exists that doesn’t have the means to invest in the market and that’s a different ball game. However, there’s a large demographic sitting squarely in the middle that can save and invest properly but don’t.
What inspired me to put this down into writing today was this thread on StockTwits that asked a simple question, “Which Stocktwits community member has made you the most money?”
StockTwits users like @Tradereversal, @cybercash28, @OptionsPlayers, @Shortseller, and @King_Biotech (just to name a few) have demonstrably illustrated the idea that you can achieve the promise of hedge funds by yourself and with the help of a community around you.
Engaging with the market on your own is an incredibly intimidating journey, but you don’t have to tread solo. The internet has given us a different world. A difference for the better in my estimation. The onus is on us to take advantage of it.