[MRM]

It is almost impossible for an individual investor without the resources of an institution behind them, to make returns that are significantly greater than the market. And to be fair, almost 90% of actively traded funds fail to beat the S&P 500 on a five or ten year basis. Those funds have all the resources and insider information possible and they still find it hard to beat the market after fees. They guy who used to handle Yale's endowment was ledgendary for beating the market, and when he retired (pre-bubble burst) he started to write a book for individual investors on how to beat the market. He eventually came to realize that he could not do as an individual what he was able to do as an institutional investor, and it was impossible for any individual investor to compete without the built-in advantages of the large institutional investors. He ended up writing a book on personal finance that recommended investing in index funds.

Here's why an individual trader can't beat the market: Do you remember the movie Wall Street? Charlie Sheen's character finally gets through to big time investor Gordon Gekko and makes his pitch, trying to get him to invest in Charlie's stock picks. Gekko keeps asking why he should buy those particular stocks; what makes them special? The central question of all stocks is why do you think it is going up in value when the seller thinks it is going down? One of you is mis-evaluating the stock. One of the two parties has superior information and better analysis than the other and knows something the other doesn't. Why is it that you know more about the stock than the one who is selling it?

In Wall Street, Charlie Sheen's answer was that did have special information that no one else had, that did affect the value of a stock. He knew of an airline who had just settled a class action suit so favorably that its stock was going to go up, and that the settlement was so secret even the named plaintiffs didn't know about it.

Of course, this was inside information, but it illustrates my point. Stock traders make money by buying stocks that are undervalued and selling them when they are overvalued. The only way you can do that is by knowing something the other side does not, or analyzing the situation better than the other side. If there was a system, or a source of information, or a way of analyzing the market that gave one investor an advantage, Buffett would already know about it and use it. The market would adjust, and there would no longer be an advantage to using that information or system, you would fall behind if you didn't have it.

So the question for you is: What do you think you know that Warren Buffett doesn't? If there's a killer stock deal out there, why doesn't Buffett know about it?

You talk about fundamentals and technical analysis. Do you know how to read a balance sheet? I mean, really sit down and take the numbers published each quarter and run your own ratios and valuations. If so, you're one in a million, and that's the starting point for a professional investor. When Buffett, of someone of his ilk, looks at a stock, they don't rely on published figures. They look into the company's books themselves. They look at actual sales volumes, sales forecasts, calculate their own estimates of profitability, and make their decision on that. It's all legal. Do you think you can compete with that? If you call the CEO of GE, do you think he'll sit down with you and explain his 6 month forecast, one year business plan, five year strategic plan, and the latest quarter's top line and bottom line results? He will if you just loaned the company 10 Billion Dollars, like Buffett did, but maybe not for you and me. These are the people you are competing with.

The number of people who have made themselves rich by trading stocks and have lived to retire on that money can probably be counted on one hand. The only way for ordinary people to make money in the stock market is careful investing over time. Actively trading is a ticket to losing everything.

Research stocks, buy carefully, but hold quality stocks for investment purposes. Don't try to trade. The pros will eventually win. Options, puts, calls, if you don't do them for a living, you don't have any business messing with them. There is a reason they are professionals. Don't try to compete with professional traders any more than you would compete with a professional athlete.