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Active trading rarely beats the market from "summary" of A Random Walk Down Wall Street by Burton Gordon Malkiel
The idea that active trading rarely beats the market is a crucial concept for investors to understand. It challenges the common belief that by constantly buying and selling securities, one can outperform the market. However, research has consistently shown that this is not the case. The efficient market hypothesis suggests that information is quickly and accurately reflected in stock prices, making it difficult for investors to consistently outperform the market through active trading. This means that even professional money managers, who spend countless hours analyzing stocks, struggle to consistently beat the market over the long term. One reason for this is that active trading comes with high costs, such as commissions, bid-ask spreads, and taxes. These costs can eat into returns and make it even more challenging to outperform the market. Additionally, the emotional aspect of active trading can lead to poor decision-making, as investors may be swayed by fear or greed. On the other hand, passive investing, such as investing in index funds, has been shown to be a more reliable way to achieve market-like returns over the long term. By simply holding a diversified portfolio of low-cost index funds, investors can benefit from the overall growth of the market without trying to time the market or pick individual winners. While some may argue that there are exceptions to this rule and that some investors are able to beat the market through active trading, the evidence suggests that these cases are rare and often due to luck rather than skill. Therefore, for the majority of investors, the best approach is to focus on a long-term, diversified investment strategy rather than chasing short-term gains through active trading.
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