Who wants to be “Average” Anyway?

It was a toss up between titling this article “Who wants to be average anyway?” and titling it “Can you beat the market?” Either way, it amounts to the same thing.

Since ‘the market’ (however we choose to measure it) reflects the average performance of all the participants, it may be quite plausible to state that on average the average person can’t beat it. So you might as well just give up trying, and invest in a FTSE-tracking fund or place a FTSE 100 spread bet and simply let it run. Many people think like that, but I think rather differently.

Who wants to be average anyway?

It’s true that the average person will not become a pop star, superstar footballer or business tycoon, but if everyone thought like that then there would be no Lady Gaga, no David Beckham, and no Richard Branson.

Any ‘average’ comprises the combined performances of the out-performers and the under-performers — traders who beat the market and traders who don’t. The average wouldn’t be an average if everyone tried to meet it and no one ever tried to beat it. I don’t know about you, but I’d like to be on the right side of that average rather than simply aiming following it.

I can understand that some people take great comfort in being average. If they lose 30% of their money, it’s okay because so did everyone else who followed the FTSE (or whichever benchmark average). Well, it’s not okay, is it? And this “safety in numbers” principle only applies if you can actually match the market.

Can you even match the market?

Simply ‘matching the market’ may be just as difficult as — if not more so than — beating it. When you invest in a FTSE-tracking fund, the fund manager often fails to track the market exactly and takes some fees for the privilege. Even if the fund follows the FTSE perfectly, your investment won’t do likewise because of those fees. You would need your fund manager to beat the market in order for you to match it. By investing in an average-tracking fund you may be doomed to under-perform the very average you’re trying to follow.

Spread betting the UK 100 index (or similar) is rather more more transparent and accurate way of following the FTSE exactly, and this would be my preferred method of “being average” should I wish to be so.

I don’t want to be average, but I am well aware that…

Beating the market takes time and effort

.. and that’s why many people don’t even try. Sometimes it’s through sheer laziness, and sometimes it’s because it makes good economic sense to be an average market participant.

If you’re a bad stock picker and have poor money management skills — but you happen to be a rather good pop star, footballer, or businessman — then it may be more cost-effective to concentrate on your ‘day job’ while leaving your accumulated wealth to merely “follow the market”. And in this case it may be better to let your money follow the market average than allow it to be “actively managed” at even greater cost. When people advise to park money in simple a tracker fund, I do “get it”.

However, with a little time and effort I reckon that…

You can beat the market!

This is not actually a prediction, and I’m not saying that it is at all probable that you will beat the market. I’m just saying that it is possible, because someone has to beat the market just as someone has to become the next pop sensation or superstar Olympian.

You already know that it takes years of sacrifice and training to become an Olympic standard sportsman (or sportswoman), and contrary to popular belief — most pop sensations are not overnight sensations. Christina Aguilera, Britney Spears, and Justin Timberlake had to serve time in the Mickey Mouse Club prior to reaching their present levels of super-stardom.

The question is: do you have enough free time and mental resolve to become educated via this web site and others, and to take a few unavoidable but very educational hits at The Trading School of Hard Knocks? If not, you’ll just have to content yourself with being average — or worse. But that’s okay, because you know that there is safety in numbers when you simply run with the herd.

Tony Loton is a private trader, and author of the book “Position Trading” (Second Edition) published by LOTONtech.