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Beating the Market, Self-Defeating Prophecies, and Future Uncertainty

Top 5 of the Week of November 14

In the Top 5 this week, The Intelligent Investor Jason Zweig explains how there is one sure way to beat the market. Collaborative Fund’s Morgan Housel uncovers why sometimes it is the most intelligent people who fail to make smart decisions. And John Rekenthaler for Morningstar contemplates the state of today’s index fund industry.

Vintage Value writer John discusses why it’s so hard to make stock market predictions. And Ben Carlson of A Wealth of Common Sense asks the question every investor is thinking at the moment; will Trump’s presidency lead to a stock market bubble…

“Beating the Market Is Easy…


  • …just understate its performance.” By not comparing S&P 500 returns including dividends it’s no wonder investors look like savvy stock pickers against the statistics
  • By ignoring one of the two ways to gain return (price gains and dividends) within your benchmark you are demonstrating an unequal comparison
  • The Securities and Exchange Commission requires mutual funds to include dividend income in their performance data
  • But beware, not all financial advisors and investment pros play by the same rules

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The Flaws in Our Decision Making Skills


  • Being clever and making smart decisions are not automatically linked; in fact, there are times where being too smart prevents you from making good choices
  • High intelligence actually allows us to kid ourselves with far-fetched reasons for why things happen—especially when it comes to justifying our own actions
  • Smart people are convinced that it takes a complex solution to solve complex problems and struggle to get past that idea
  • True brilliance is conveying challenging ideas in the simplest manner

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Today’s Fund Industry Broken Down


  • Index funds vary from provider to the indexes they’re based on and from the tracking errors involved to the expense ratios
  • It is trading costs that differentiate one index fund from another
  • Sharp investors have moved away from costly active managed funds in favor of the cheaper low-cost index funds to outperform market averages
  • Before, an increase in incoming assets had a negative impact and the fund would start to lag, but now index-fund providers are bolstered by strong sales

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How Market Forecasts are Self-Defeating Prophecys


  • Markets (and history) are level two chaotic systems: they react unpredictably to any predictions made about them
  • If investors act upon share price forecasts, they can drive the value up in an entirely different manner making the original forecast null and void—a self-defeating prophecy
  • Predictive models, at best help us make informed guesses, but even these, as the recent results of the general election demonstrate, may not always be right

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The Future Is Uncertain That’s For Sure


  • Whatever your political stance you should never let politics weigh in on your financial decisions
  • Given that a recession or market crash is always within the boundaries of possibility anyway, one or the other could happen with or without Trump’s presidency
  • To deal with the inescapable future volatility which the recent results will undoubtedly surface it is far better to be prepared than spend time on predictions
  • And bear in mind, one person or party cannot rule over the US stock and global markets

Do you think Trump’s presidency could lead to a stock market bubble? Share your thoughts in the comments section below
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Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form – and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.


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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Become a Better Investor Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.