What sort of competition do I face as an investor?

Simon Brown, Partner and Chartered Financial Planner, explains the degree of competition that all investors face and what this means for trying to outguess the market.


Simon Brown, Chartered Financial Planner:


There are millions of investors and computers creating millions of market transactions every day and those transactions create real time information which set the market prices. This means competition is intense.


Attempting to outguess the markets is a zero-sum game, for every winner there has to be a loser. From a mathematical perspective, all returns form a normal distribution, so the majority cluster around the middle of the distribution, or the average return.


This blue zero-sum bell curve shows the outperforming investors equal the underperformance. The sum of the two equals the market return. The problem is, it costs to play the game, more than half underperform and the outperformers are represented by the white reception. In today’s winners tend not to go on to be tomorrow’s winners, implying that short term performance is more likely to be due to random noise and luck rather than skill. The odds of finding tomorrow’s winning securities are gambling odds, which isn’t a good strategy for a long-term investment portfolio.


If you get promised high returns and a low-risk investment through trying to outguess the market, then you should be wary of the advice you are getting. For your long-term interest, investors should rely on the information in market prices to help build their portfolios instead of trying to find short-term opportunities.


Financial markets reward long-term investors over people who attempt to outguess the market.