How To Beat The Market By As Much As The Typical Investor Underperforms

May 18, 2019 2:07 AM ETQQQ, VYM, IJR, IVV, USMV27 Comments
Logan Kane profile picture
Logan Kane


  • In a prior article, I took an inventory of factors that drive risk and return in various investments.
  • In today's piece, I will expand on this and explain why major factors exist, structurally.
  • You can use the implications to build a better portfolio.

Much of the asset management industry is currently focused on delivering "smart beta" with low fees. The main approach currently in use is to find factors that have historically outperformed the broader market and tilt portfolios towards them. The underlying premise is sound, but the implementations sometimes fail due to poor forecasting ability of the sponsors, transaction costs, or both. However, when used properly, factors of risk and return can be used across asset classes to build very strong portfolios. Let's take a quick look at some common factors in stocks, why they exist, and the groups of investors on the other side.

It's clear that the average retail investor badly underperforms the market. Retail trader performance is so bad that often brokers trade directly against retail by shorting them the assets they buy on margin. A guy named Anton Kreil has some good videos on this (below).

After watching, it seems likely that the HFT firms that buy Robinhood customers' orders follow the same model and simply take the other side of their customers at all times and hedge the positions with long S&P 500 futures. Then, when people lose all their money trading, the funds end up in the accounts of the HFT firms. This is doubly true for options, although the mechanics of the hedges are a little different. Kreil breaks down some conflict of interest patterns for retail brokerages in the video (he focuses on forex and euro-style CFDs, but many of the same conflicts are present in US-facing retail brokerages).

But if what retail traders are doing doesn't work, then what does? Academic finance has some ideas. Anomalies 1-3 are pretty basic but are worth explaining to everyone interested, but longtime readers might want to skip to 4, 5, and 6 if you want to be surprised a little.

This article was written by

Logan Kane profile picture
Author and entrepreneur. My articles typically cover macroeconomic trends, portfolio strategy, value investing, and behavioral finance. I like to profit from the biases and constraints of other investors. Paywalled articles are available along with 1,000+ other authors by subscribing to Seeking Alpha Premium.You can read some more of my work for free here on my Substack.

Disclosure: I am/we are long QQQ, SPY, VYM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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