Doing some research recently I’ve found that almost 9 out of 10 of the trades on any given day on Wall Street are between professionals, not individuals. Think about that for a second. When you go to make a trade, 9 out of 10 times you are doing it against someone that does it for a living. And not just a living, but paid really big bucks to do it and has a tremendous amount of resources behind them. This includes mutual funds, pension funds, hedge funds, professional speculators, investment banks, etc.

But it gets even better. If 9 out of 10 trades are between professionals that means that most of the trades pros do are between each other. Now that’s interesting to consider. That means the average you see in the investing products on Wall Street represents the best that the pros on Wall Street can do in any single year.

Often I read about an investing strategy or trading method that claims to beat the broad market indices. That’s a pretty bold claim. I have to wonder if the sellers of these ideas are aware of the reality of trading on Wall Street. To think that you’re going to teach an individual investor to go up against a highly skilled pro and win. It’s kind of like telling an amateur golfer they are going to turn into Tiger Woods if they just buy the right golf club.  It’s a fun thing to think about, but just not very realistic.

Even much vaunted hedge funds, the supposed masters of secret Wall Street strategies, often bomb. If they can’t do it, what chance does an individual have?

THERE’S yet more evidence that it makes sense to invest in simple, plain-vanilla index funds, whose low fees often lead to better net returns than hedge funds and actively managed mutual funds with more impressive performance numbers.

Basic stock market index funds generally aspire to nothing more than matching the returns of a market benchmark. So in a miserable year for stocks, index funds may not look very appealing. But it turns out that, after fees and taxes, it is the extremely rare actively managed fund or hedge fund that does better than a simple index fund.

That, at least, is the finding of a new study by Mark Kritzman, president and chief executive of Windham Capital Management of Boston. He presented his results in the Feb. 1 issue of Economics & Portfolio Strategy, a newsletter for institutional investors published by Peter L. Bernstein Inc.

The Index Fund Wins Again, Mark Hulbert February 21, 2009
http://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html

I’ve been to financial firms on Wall St. in the past and had a chance to see some of their trading operations. These firms are trying everything possible to make a buck off each other. They are highly competitive and highly compensated if they manage to do it. Many use cutting edge hardware, algorithms and trading techniques trying to sniff out every last penny of advantage. There are actually magazines for the field (http://www.automatedtrader.net) discussing advanced applications in areas of High Frequency Trading and other esoteric topics.

These firms are looking for every possible edge to gain. And the harder they look, the more efficient the markets become. It is almost impossible to get an information edge, and therefore consistent excess profits, over anyone else at those levels. This is why, despite their best efforts, many funds cannot beat the market average once you subtract the costs from what they do.

You cannot compete against Wall Street with a home computer and technical analysis charts. The NSA would have a hard time competing against some of the computing power these firms have.

Sitting back and letting these people slice each other to pieces on trading is the best strategy. A Permanent Portfolio using a simple stock index fund let’s you do just that. You cannot compete against Wall Street with a home computer and technical analysis charts. The NSA would have a hard time competing against some of the computing power these firms have. This is why trading against the pros is a losing proposition on all fronts. Not only are you not likely to beat them, but they can’t even beat the simple market average themselves.

Conclusion?

Just own index funds where appropriate for your Permanent Portfolio. Don’t waste time and money trying to compete against those that aren’t even competitive against market averages.

Reminder: You can sign up for the announcement list for the upcoming Permanent Portfolio Book here.

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