Beating the Stock Market: From Nate Silver's "The Signal and the Noise: Why Most Prediction Fail-But Some Don't"

" As the legendary investor Benjamin Graham advises, a little bit of knowledge can be a dangerous thing in the stock market. After all, any investor can do as well as the average investor with almost no effort. All he needs to do is buy an index fund that tracks the average of the S&P 500. In so doing he will come extremely close to replicating the average portfolio of every other trader, from Harvard MBAs to noise traders to George Soros’s hedge fund manager. You have to be really good—or foolhardy—to turn that proposition down. In the stock market, the competition is fierce. The average trader, particularly in today’s market, in which trading is dominated by institutional investors, is someone who will have ample credentials, a high IQ, and a fair amount of experience. “Everybody thinks they have this supersmart mutual fund manager,” Henry Blodget told me. “He went to Harvard and has been doing it for twenty-five years. How can he not be smart enough to beat the market? The answer is: Because there are nine million of him and they all have a fifty-million-dollar budget and computers that are collocated in the New York Stock Exchange. How could you possibly beat that?”

 "In practice, most everyday investors do not do even that well. Gallup and other polling organizations periodically survey Americans on whether they think it is a good time to buy stocks. Historically, there has been a strong relationship between these numbers and stock market performance—but the relationship runs in the exact opposite direction of what sound investment strategy would dictate. Americans tend to think it’s a good time to buy when P/E ratios are inflated and stocks are overpriced. The highest figure that Gallup ever recorded in their survey was in January 2000, when a record high of 67 percent of Americans thought it was a good time to invest. Just two months later, the NASDAQ and other stock indices began to crash. Conversely, only 26 percent of Americans thought it was a good time to buy stocks in February 1990—but the S&P 500 almost quadrupled in value over the next ten years"

Nate Silver (2012-09-27T00:00:00+00:00). The Signal and the Noise: Why Most Predictions Fail-But Some Don't (Kindle Locations 6096-6103). Penguin Press HC, The. Kindle Edition.