We’ve all heard stories about investors who consistently beat the market. There are books about them, conferences dedicated to them, and YouTube videos made about them. It’s no secret that there are investors out there who have beaten the market consistently for years. But what we don’t know is how they do it: What stocks do they invest in? How much risk do they take?
The Legendary Investors
Warren Buffett, for example, has produced a 20.9 percent annualized return over fifty-three years. Peter Lynch of Fidelity returned 29 percent over thirteen years. And Yale’s David Swensen has returned 13.5 percent over thirty-three years.`
They have phenomenal investing skills and have earned their titles as some of the best investors in the world. But just because these guys can consistently beat the market doesn’t mean you or I can.
Is It Possible To Beat The Market?
Yes, theoretically, it is possible to consistently beat the market (which typically returns around 8 percent after you account for inflation), in the same way it is possible for me to become a heavyweight boxing champion. With millions of people around the globe trying to beat the market, statistically there are bound to be a few extreme outliers. Who knows whether their success is due to statistics or skill? But even the experts themselves agree that individual investors shouldn’t expect to equal their returns. Swensen, for example, has explained that he achieves outsize returns because of top-notch professional resources, but more important, access to investments that you and I will never have— such as the very best venture capital and hedge funds, which he uses to bolster his asset allocation. These professionals spend every waking hour studying investments and they have access to proprietary information and deals. Mom and pop investors have no chance of competing with them.
Survivorship Bias and Financial Ratings
Financial companies know very well about survivorship bias, but they care more about having a page full of funds with great performance numbers than revealing the whole truth. As a result, they’ve consciously created several ways to test funds quickly and market only the best-performing ones, thus ensuring their reputation as the brand with the “best” funds.
These tricks are especially insidious because you’d never know to look out for them. When you see a page full of funds with 15 percent returns, you naturally assume they’ll keep giving you 15 percent returns in the future. And it’s even better if they have five-star ratings from a trusted company like Morningstar. But now that we know about survivorship bias and the fact that most ratings are meaningless, it’s easy to see that financial “experts” and companies are just looking to fatten their wallets, not ensure that you get the best return for your money.
How to live your Rich Life
While some people thrill at the idea of amassing a fortune, either via saving or investing, most of us pursue wealth-building strategies as a means to an end. Ultimately, our goal is to live a Rich Life, however we define it.
For some people, living a Rich Life means following certain conventions — you buy big houses, drive expensive sports cars, acquire a wardrobe to die for, and take regular five-star vacations — while to others, these Rich Life traps have nothing to do with living the Rich Life. Rather, to them, living a Rich Life means having enough financial security to maximize their enjoyment in the activities, things, and relationships they value most.
As you continue to build wealth and explore what living a Rich Life means to you, I Will Teach You to Be Rich offers plenty of free resources to give you the know-how you need to move forward in your journey.