Stock Trading and Other Things

Can a highly intelligent individual significantly beat the market trading?

Assume somebody with an unusually high iq and a substantial understanding of gambling mathematics, finance, and economics.

Assume this individual would be working with total capital of approximately $100k and would work from his home office.

Assume this individual could devote several hours per day if necessary.

Realistically, is there a reasonable way this individual could master getting in and out of investments in a way that leads to a significantly higher return than the general market?

I am pretty well versed in the efficient market hypothesis, and I generally think that short-term trading is little more than flipping coins with transaction costs. But there clearly are entire firms set up that apparently make money trading the market, and there are individuals who do make significant income trading. These successful traders are likely like any business person who found a profitable niche: they do all they can to not publicize how they're making money.

Thanks.

Public Comments

1. I highly doubt it.

2. What will it really mean to "beat the market"? it's about being right more than 50% of the time. That's what successful traders are doing. Being right more often than wrong. One could beat the market with one successful trade.

3. I am not telling you how I do it. You have to learn for your self. I will be glad to take your money, come in to the market.

4. Likely. Your real key to success is not a high IQ but vision. To be able to see market trends changing 6 months in advance will help you buy low. For instance, had you been able to see the energy boom in 00-01' and buy Exxon stock low you would have been all set. Same goes for the recent commodities boom

5. Sure their are many people who can continually make 2 to 3 did-git returns on their money year after year.

Anyone can do it, They don't even need a high IQ.

all they need is to learn a few simple rules and develop a system.

This is a great website that can teach you all these rules and help you develop your own system.

6. you are talking about nothing more than Quant investing....this is a passive way to invest and used by many fund managers who create a formula to invest and let it ride. The only problems is you cannot always equate for special events (disaters, sub prime, elections, etc). This is the problem with this volitile market. The answer to your question is yes...but no guarantee it will work.

7. Intellectual type of intelligence is not enough to make money on the stock market. You need to have emotional intelligence too in order to succeed. And whether you have this kind of intelligence or not only your experience can show.

If good understanding of economics and finances was enough to make lots of money in the stock market. Then all the economics professors with their PhD's would have been billionaires.

8. Yes. One way is to place bets against the very unlikely happening. If it does happen you just bet again the same way again. It involves futures and you set your risk levels using deltas. Sorry I cannot explain it any better.

9. if you know fourier transforms and are good at statistics you can find three month cycles in many stocks (I have a list of about 200) from which you can pick let's say 50 per year that are likely to give you 9%-10% returns over given three month periods.
I personally have been playing this "system" for 4 years now with $20000 total investments and have made 8%-9% real returns each year (that turns out to be about 5% after the darned fixed fees they impose per trade).
So you could make money but you would have to be able to do trading with a lot more $ (so that the fixed fees are a lower percentage of the investment) or find some place that charges less than $7 per trade.

10. I get several Financial Newsletters from Ivy League Graduates with Maters and Doctorate Degrees in Economics, and you know what?

I have tracked their picks for 18 years, and their high level of education has very little to do with stock results. I have done far better with my own research.

I do however, put about $10,000 in an account specifically dedicated to short term investments. Overall, I have done pretty well, but it is a crap shoot.

Good Luck

11. The thing you need to ask is: the individuals who make money trading, how "consistent" are their gains, and how much of it is attributable to "luck" rather than skill.

If you look into it, I think you'll find that many traders will have a certain amount of luck for a period of time, they'll rack up a bunch of gains and then one day something unexpected will happen or the randomness will rear its head and suddenly they are wiped out.

Most people I know who made a lot of money in finance did not do so from trading. They did from being stock brokers or selling some sort of ideas or skills to people that thought these were valuable.

I'll recommend a good book to you to drill the point home: "Fooled by randomness" by Nassim Taleb.

I once asked a similar question to the head of the quant group at one of the big investment banks on Wall Street. The answer I got was succinct:

"Financial markets are a random walk. I cannot imagine that trading would be a lucrative business. By the time you're buying, the smart money has already sold."

12. The data on this supports the efficient markets hypothesis pretty well. Studies have been done where researchers gather data on how successful (or unsuccessful) various types of trading companies are in beating the market, and generally these enterprises fail or don't have statistically significant success in the long term.

The most obvious enterprise of this type to try to study is mutual funds. Mutual funds are a good subject because mutual fund managers tend to be very, very smart, and each one of them has an entire staff of smart people armed with cutting-edge models and data, as well as a Rolodex full of other smart people (and insiders) that they can mine for information. In short, they're the most well equipped people to beat the market.

The data seems to show that actively managed funds (that is, funds that "pick stocks" in an attempt to beat the market) actually trail the broad market over the long term, net of transaction costs. Of course, some funds do beat the broad market in the short term, but the list of funds that beats the market changes from year to year and doesn't follow any consistent pattern.

Mutual funds do offer a service to investors, of course: Diversification. Diversifying through mutual funds is much, much cheaper than building a portfolio of individual stocks. However, index funds are the way to go. They generally outperform actively managed funds and the costs are lower.

13. If you are well versed in efficient market theory then you know the answer is that it is not very unlikely. There are thousands of intelligent people with sophisticated computer models , research resources, low transaction costs and even access to corp executives that are tryiing to get an edge. What makes you think you can consistantly gain an edge.

They keep coming up with gimmicks: portable alpha, long short funds, commodities, seperately managed accounts, hedge funds etc.

Superior intelligence makes a difference in most careers but when it comes to investing it doesn't seem to make for a consistant winner. That's because no one knows what the market or interest rates will do. The don't know the market bottom or the market top. They can study leading indicators, back test ideas, look at underperforming industry groups, currency changes - and it all seems like science until they try to predict which stocks, sectors etc will prosper on a consistant basis.

Actually, you could say intelligence is a handicap because it tempts you to think you can beat the market or you have an angle that nobody has thought of. Or it makes you unlikely to set up a simplistic index fund portfolio and just rebalance it once a year. Surely an intelligent person should be able to do better if they just study the market a bit more.

Good Luck

14. Contrary to most of the others who have answered before me, I think that you have to be a complete idiot to lose money in the stock market. The only way that I can see, that people lose money, is because they panic, or they do things which are really, really, stupid. You'll never go broke betting on the stupidity of others. I only have a tenth grade education, but I make a good living in the stock market, by simply letting really "intelligent" people, give me money.