According to Leigh Drogen:
Rule #1: Don’t lose money.
Rule #2: See rule #1.
Those were the first two things I was taught by David Geller
on my first day as a trader at Geller Capital.
For some of you that may seem obvious. Don’t lose money, of course, who
the hell would think otherwise. For
those mentioned above, you most likely already know that when we actually look
at the universe of market participants, you’re in the minority, the very very
small minority.
Fact is, most market participants engage in relative return
strategies where losing money is part of the game. Why? Because somewhere along
the way, in order to make huge assets under management fees, large asset
managers realized that it was easier to make people believe that their job was
to beat an arbitrary benchmark than actually make money for their clients. By
doing this, they were able to trade around the margins, and collect their fees
whether they did well or not.
How did this happen? Well, it came about via the efficient market
theory, which we now know to be complete garbage. Yes, it won a Nobel Prize, so
did Obama (that’s not a political jab, you get the point). The asset managers
took this defunct theory and used to to make people believe that your goal
should be to outperform some average of assets in the same universe (stocks in
an index). Their marketing machines went into overdrive when Americans got a
bit wealthy and wanted a piece. And it worked for a while, because it’s easy to
push this way of thinking when the economy and or the market are surging year
after year.
Until it doesn’t. I agree with all the literature that says the average guy
should not be investing in long only mutual funds that attempt to beat their
benchmarks. The evidence is pretty irrefutable, after fees it’s almost always a
bad deal. What I definitely do not agree
with, is the idea that instead, the average guy should be investing in an
index....
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