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The Smartest Things Ever Said About Beating the Market

The academic evidence on beating the market is pretty clear: the hurdles are simply too great for consistent outperformance. But sometimes, it can be helpful to hear it from some of the biggest names in the industry. Today, we'll look at the most insightful quotes from the financial world regarding beating the market.

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"Like everybody else in this industry, I have an ego large enough to believe I'm going to be one of the select few that will outperform." -- Gus Sauter, chief investment officer, Vanguard

"Success in investing doesn't correlate with IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people in trouble investing." -- Warren Buffett, CEO, Berkshire Hathaway

As with many decisions, the decision to try to outperform the market starts with the ego. By trying to complete the quest for alpha, you're effectively saying you're smarter than the market. To be a prudent investor, you need to understand that your smarts (no matter how smart you may be) are no match for the collective wisdom of the market.

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"Stock-picking pros aren't stupid. They're just expensive." -- John Bogle, founder, Vanguard

"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals. Seriously, costs matter." -- Warren Buffett
This is an important reminder that simple outperformance isn't enough to justify using active management. You need to have outperformance after costs. This means all costs -- transaction fees, manager fees, loads (which you should never pay, but that's a post for another day), advisor fees and taxes.

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"It is difficult to systematically beat the market. But it is not difficult to systematically throw money down a rat hole by generating commissions (and other costs)." -- Michael Jensen, professor, Harvard University

It may seem like brokers are on your side when they suggest getting out of certain funds and moving into others. However, these moves are more likely to make them rich by generating commissions than to make you rich by beating the market.

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"The fact that no one has ever come close to finding a consistent way to beat the system -- despite intense efforts by some of the smartest people in the world -- probably indicates that such causal trends do not exist, and that sequences are effectively random." -- Stephen Gould, author

"I have personally tried to invest money -- my clients and my own -- in every single anomaly and predictive result that academics have dreamed up. And I have yet to make a nickel on any of these supposed market inefficiencies." -- Richard Roll, Roll and Ross Asset Management

There are thousands and thousands of people trying to identify ways to beat the market. Truthfully, some people may stumble on a way to systematically make money, but the Efficient Market Hypothesis tells us that the very act of exploiting any anomalies will likely end up reducing the advantage to zero.

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"I can't recall ever once having seen the name of a market timer on Forbes' annual list of the richest people in the world. If it were truly possible to predict corrections, you'd think somebody would have made billions by doing it." -- Peter Lynch, former manager, Fidelity Magellan

"Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves." -- Peter Lynch
Many people point to the likes of Warren Buffett as an example of someone who can beat the market. Lynch is essentially asking a simple question of those people: With so many trying, why aren't there more names?

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"The S&P 500 is a wonderful thing to put your money in. If somebody said, 'I've got a fund here with a really low cost, that's tax efficient, with a 15-to-20-year record of beating almost everybody,' why wouldn't you own it?" -- Bill Miller, manager, Legg Mason Value Trust"

"Buying an index fund over a long period of time makes the most sense." -- Warren Buffett
Many active management proponents will claim that being a passive investor means settling for average. However, the evidence is pretty clear that index funds and other passive investments have outstanding records compared to their active counterparts.

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"Beat the market? The idea is ludicrous. Very few investors manage to beat the market. But in an astonishing triumph of hope over experience, millions of investors keep trying." -- Jonathan Clements, author

It sounds ridiculous, but it's true -- your best chance of outperforming other investors is to stop trying to beat the market. Let everyone else spend way too much money trying to achieve what is no more than luck. When the dust settles, the odds are in your favor.

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"The truth is, much as you may wish you could know which funds will be hot, you can't -- and neither can the legions of advisers and publications that claim they can. That's why building a portfolio around index funds isn't really settling for average (or a little better). It's just refusing to believe in magic." -- Bethany McLean, journalist, Fortune
"By day, we write about 'Six Funds to Buy NOW!' By night, we invest in sensible index funds. Unfortunately, pro-index fund stories don't sell magazines." -- Anonymous Fortune writer

Efforts to beat the market have greater costs than just dollars. It also takes time. How much is your time worth? Let's say you manage to outperform the market, even after costs. Was the time you spent truly worth it? Phrased another way, was it worth the time you could have spent with your family, with your friends, doing volunteer work or pursuing one of your passions?

That may be the most underrated (and possibly most important) benefits of a passive investing strategy: You stop wasting time that you can never get back.

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More on MoneyWatch:
What Does Passive Management Actually Mean? Municipal Bonds: Was Meredith Whitney Right? Why Buying Money-Losing Investments Can Be a Good Strategy Investors Lose $113 Billion on Complex Investments Gold and Silver, What Goes Up...
Three ways I can help you become a wiser investor:

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