The Independent Market Observer

My Next Project: How to Beat the Stock Market

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Apr 12, 2019 2:04:17 PM

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stock marketI enjoy what I do. As an economic and market analyst, I get to play the most complicated and highest-stakes game there is—and get paid for it. Plus, I have the chance to spend quite a bit of time looking at, and thinking about, a wide range of data about pretty much everything. As such, there are a lot of ideas floating around that I flag and plan to come back to at some point.

Most recently, I got interested in portfolio drawdowns and the effects they have on investor failure. Although that topic wasn’t something that really intersected directly with my day job, I did take it on as a personal project. After a lapse of years, this project led to my recent book, Crash-Test Investing.

With my book, I solved (at least to my own satisfaction) one of the outstanding problems in investment management for the average person. But the process started with taking a couple of ideas from my day job and then spending quite a bit of spare time asking, how could that be better? Good thing I like what I do.

What did I learn?

There are a few lessons I took from that process. First, writing a book takes an amazing amount of work, and I needed someone to keep me on track. Thanks again to my colleague, Kate Flood, for doing just that. Second, and of more general applicability, there are a lot of interesting ideas out there, many of which can be even better in combination. Third, properly defining your objective provides a very clear lens to how to make those idea combinations. These are the guidelines I have adopted for my next personal project.

None of that means you will succeed in what you set out to do, however. In the case of the drawdown project, the original objective was to come up with a portfolio with a maximum drawdown of 10 percent. I didn’t get there—1987 blew that away—but I got a lot closer than I expected and close enough to come up with something that was new and useful. By defining the problem in a new way, and using existing methods combined to meet that definition, I didn’t solve the original problem. But I did solve a useful problem. And that’s good enough.

My next project

That method will guide my next project, which is to figure out how to beat the stock market. Slow and steady is great. It’s what gets people to their goals. But what we really want is a chance to get rich quick. To quote the well-known investor Homer Simpson, “After years of disappointment with get-rich-quick schemes, I know I’m gonna get rich with this scheme. And quick!” I have decided to take a closer look at beating the market on an absolute basis, not just a risk-adjusted one. I’m gonna get rich. And quick!

It will be different this time

I have tried to figure this problem out a couple of times before, usually just before the market peaked. So, put this up on the list of warning signs we talked about earlier this week. This time, however, will be different (ha!) in a couple of ways.

First, I don’t expect to solve the problem. But I do expect to learn a lot as I dig into it. Second, even if I don’t solve the problem, I might find a problem that I can solve that turns out to be useful. I am counting on the first (learning a lot) and hoping for the second. I know considerably more this time around, most notably in being humble about the limits of what we can do. That seems like a reasonable set of expectations going into the project. At a minimum, I will have a better understanding of what the stock pickers we work with do—and that will be helpful for everyone.

Will there be another book?

Ask me this question in five years (or more), as I started the project that became Crash-Test Investing, published in 2018, in 2011. If I come up with anything interesting that I can share, though, you will certainly read it here. Wish me luck!

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