Rat Race Millionaire: Seven secrets from a 40-year-old millionaire by Michael Hung

Author:Michael Hung [Hung, Michael]
Language: eng
Format: epub
Published: 2015-10-14T21:00:00+00:00

Beating the Pros

“You can beat the market professionals by managing your own investments.”

The statement above is from the introduction of this book. I am sure that you asked yourself when you first read it, asking: “How can this be true?” Common sense dictates that the professionals at investment firms have to be better at investing than the average Joe. They have MBAs, math nerds (called Quants at some high-end investment firms) and super computers. They are all employed to analyze massive amounts of quantitative data and take advantage of transient opportunities or macroeconomic trends in hopes of making a profitable trade. Yet, the truth is that it is extremely difficult to beat the market average consistently, even for companies that have teams of experts trying to do this day in and day out. Yes, there are a few exceptions, like Warren Buffett, who seem to have a knack for picking great investments and creating better than average returns, but they are a rarity. Some fund managers and investment bankers may be able to beat the market in certain economic conditions. They just seem to know what to invest in when a specific set of market conditions exists. However, once the tide turns, their performance suffers. Their fall from grace can be terrific at times. A good example would be the tech bubble near the end of 1990s. Some fund managers’ performances were nothing short of miraculous. They had triple digit gains for a few years. But when the bubble burst, all of their gains evaporated. Because some of the profits were made using leverage (they used borrowed money to invest), they were taken to the cleaners. Most small investors like you and me are not privy to the information that large investors and people in the industry have. That means that we tend to jump on the investment band wagon late when the news about the newest “hot investment” is already old. The downside of this to your portfolio can be devastating. Joining the party late (buying when the price is at its height) means missing out on significant gains when the asset was appreciating while exposing you to some serious downside losses when the market crashes.

The simple truth is the majority of the market professionals (those in the business of making money off of the market) cannot beat the market average once the costs of running their business are factored into the equation. There are fixed costs like leasing office space and flexible costs like salaries and marketing. In addition, there are additional costs associated with complying with Federal Trade Commission (FTC) regulations. Some investment firms or mutual fund companies have impressive office space and even more impressive salaries for their managers. Some hedge fund managers make hundreds of millions of dollars a year, regardless of their performance[6]. Considering all of these costs, no wonder actively managed financial portfolios generally provide less profit to investors than their boring counterparts like plain vanilla index mutual funds or index exchange-traded funds (ETFs) do.

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