If you had just a 10% chance of being successful at skydiving, would you jump?

Let’s not be ridiculous, of course you wouldn’t.  You might not even jump if you had a 99.998% chance of landing safely, which you do.

Now, think about this…

Would you buy a stock if you knew you had just a 10% chance of making money with it?

Of course you wouldn’t. Or at least you shouldn’t.

But chances are, if you’re the type of retail, self-directed investor we’re about to talk about, you’re going to go ahead and do it anyway.

You see, there are a lot of losing traders out there. A whole lot of them. In fact, it’s estimated that only 10% of self-directed investors actually make money trading in the stock market, while 90% lose money.[1]

With over 63 million Americans owning a retail brokerage account, that’s a whole lot of losers.[2]

So, why do so many self-directed investors end up losing more money than they make?

Well, recent history can teach us a lot about why.

During the pandemic, an estimated 16 million Americans got bored, opened a brokerage account and became first time stock traders. Genius stock traders, many would claim.

As you recall, the roughly 21-month long bull-market that occurred during that time resulted in the S&P 500 returning investors over 114%.[3]

That’s almost 13 years of traditional 9% returns crammed into a few short months.

The market was so hot that almost everyone was making money back then…

Toss a dart at a ticker and it went up.

But like all good things in life, it didn’t last forever.  By the time the spring of 2022 rolled around, the bull market turned into a bear market, and those “genius” first time retail investors got ground up and spit out by smart money.

Which brings us to why?

Today, just like in 2020, many self-directed investors chose their investments/trades based on what others are doing, rather than searching for diamonds in the rough. I.e., they don’t conduct much due diligence, if any at all.

And research? Forget about it.

Retail investors hear about the huge up-trend in stock X, and how everyone is getting in on it… and then they too follow suit by going in heavy.

And we all know how this scenario ends.

Of course, trend trading can be very fruitful, but you have to know what you’re doing, and you must have the proper tools that can help with measuring true market sentiment – tools like smart money uses.

But without the right sentiment and timing tools, many retail investors find themselves overexposed when the market takes a quick turn, and they end up losing their shirts (more on this in a minute).

Now, following the crowd and being late to the party isn’t the only reason so many retail investors lose. A huge factor in investor losses comes down to greed. Like we said earlier, during the pandemic bull market you could basically pick a winner from a hat.

Because so many stocks rose so quickly, a “get rich quick” theme emerged among retail investors.

Especially those who followed social media “stock gurus.”

Dave Portnoy, from Barstool Sports, famously said in June of 2020, “Say it with me… Stocks only go up. Only losers take profits.”[4]

People believed him.

The “get rich quick” mentality has also led to retail investors over-trading, chasing play after play, having no patience and foregoing long-term profit potential for short term gains.

This leads to booking gains too fast (you need capital to keep “playing”) and holding onto losers too long; with the belief they’ll eventually turn around… even if they’re down 30, 40, 50 percent or more.

Unfortunately, those losers end up outweighing the winners, hence the 90% loser rate.

Clearly, this is the very opposite approach most professionals take, where winners are left to run, and losers are cut quickly.

Sorry Mr. Portnoy, not all stocks go up.

Now, there are a whole lot of other reasons why retail investors often end up on the losing end of a trade. But the most pervasive reason is a likely a complete lack of due diligence, a complete lack of intelligent market research…

And a resistance to using professional-level tools designed to help gauge real market sentiment and to help assist in market timing.

It seems most retail investors simply don’t want to put in the work.

Now, we mentioned earlier how without the proper sentiment and timing tools, many retail investors can get caught overexposed in a market turn, are late to the party when it comes to sentiment swings…

And end up shirtless.

This is why smart money has been using SentimenTrader for so long. You see, the professional-level tools that SentimenTrader offers is believed by many to give a serious edge over dumb money.

In fact, a quick review of their website shows the vast majority of those who’ve commented on its products are, in fact, investment professionals. Aka, smart money.

But…

Unfortunately, only a portion of SentimenTrader’s users are retail, self-directed investors.

Why?

Perhaps too many retail investors believe it’s “too much work” to get SentimenTrader (it’s not) …

And they aren’t aware of the edge that SentimenTrader could be offering to smart money…

Is actually available to them too.

 

[1] 90% Retail Investors Lose Money – Rediff.com Get Ahead

[2] Must-Know Brokerage Account Statistics [Current Data] • Gitnux

[3] A History Of U.S. Bull Markets, 1957 to 2022 – Forbes Advisor

[4] (1) Dave Portnoy on X: “Say it with me… Stocks only go up. Only losers take profits. #DDTG https://t.co/PEqS7igaAf” / X (twitter.com)

$10,000 suits, 200-foot yachts, private jets, and ownership in professional sports teams. If this sounds like a lifestyle you’d want to enjoy, and it probably is, you should consider becoming a billionaire hedge fund manager. One of the glamourous, “smart money” titans of Wall Street…

You could make an absolute killing.

Take Steve Cohen, for example. He’s the Founder, Chairman and CEO of Point72 Asset Management, one of America’s largest hedge funds.

According to Forbes, Mr. Cohen, who also happens to be the owner of the New York Mets, has a personal estimated net worth of $19.8 billion.

In 2023, his fund returned 10.6%…[1]

That’s not bad considering the 20-year average return for the S&P 500 is about 9.69%.[2]

His investors must have been thrilled.

But beneath that expensive private jet veneer and “market beating” return lies something a bit, well, odd.

You see, while hedge fund managers are seemingly fantastic at making money…

They aren’t really all that good at generating returns for their investors. In a moment, we’ll explain why.

But first, according to Citco’s 2023 Hedge Fund Report, the hedge fund industry averaged total returns for investors of about 14.66% last year.[3]

In a “normal” year that may seem quite good considering the long-term average returns of the S&P 500.

However, total returns for the S&P 500 last year were 26.29%. That was nearly double the return of the average hedge fund, and well over double the returns of Point72.

And 2023 was not an outlier.

The American Enterprise Institute looked at hedge fund performance from 2011-2020. They found that typical hedge fund underperformed the S&P 500 “every single year.”[4]

So why is it that a hedge fund’s typical returns do not beat the market, yet hedge fund managers are referred to as “smart money”?

Simply put, they’re smart enough to make money for themselves.

And they make that money… hand over fist.

See, it all comes down to exorbitant fees called the “two and twenty.”

When an investor signs on with a hedge fund, and invests let’s say $100,000, 2% of that $100K immediately comes off the top, leaving the account worth $98,000.

The account is already in the hole before any investment is made.

And, that 2% is an annual management fee. Meaning that at the turn of the next year, the investor will be charged 2%, once again.

Now, with that starting account value at $98,000, every single penny in profit (depending on the agreement) is charged a 20% performance fee.

This means that if the investors account increases by 10% (roughly the average return of the S&P 500), the account would be worth $107,800 (a $9,800 gain) …

Except for those “performance” fees.

When those fees are backed out, that $9,800 drops to $7,840.

Doing some quick math and you’ll see the investor made 7.8% on their money…

While the hedge fund made almost 4% on, well, not their money.

This is what makes hedge fund managers “smart money.” So long as their investors stay invested, they make money.

Clearly, a hedge fund wants to beat the market. Who doesn’t.

But hedge funds aren’t as incentivized to beat that market as you, or I are. You see, no matter what happens (so long as investors stay invested) hedge funds collect at least that 2% management fee…

And don’t ever pay out an “underperformance” fee.

Smart, for them. Not so smart for their investors.

So, how can a self-directed investor beat the average hedge fund?

Well, let’s assume that $100k account again, but this time you’re investing on your own so there’s no “two and twenty” fees.

We’ll use last year’s S&P 500, as well as last year’s average hedge fund returns as an example, as we cannot predict with any degree of certainty what will happen this year (nobody can).

Let’s assume that with your $100k, you invested 50% of it in the S&P 500, reinvesting dividends. That $50k portion of your portfolio would’ve been worth $63,145 at years’ end (less those small transaction fees).

Now, let’s say you invested the other half of your $100k into single stocks. You read some great research reports (like those from SentimenTrader), understood the market cycle and made your picks.

Maybe you hit some homeruns, and maybe you had some serious duds (never listen to the checkout guy at the grocery store), and your performance on that $50k ended up being half the return of the S&P 500 (13.15%).

That portion of your portfolio (less small transaction fees) would have ended the year at $56,575.

In total, between your S&P 500 portion and your single stock portion (with your single stocks lagging the S&P by 50%) …

Your total account value would’ve been about $119,720, a 19.7% total return…

All without the two and twenty, and you’d have beaten the average hedge fund by 34%.

Of course, every year will be different, but historically speaking, so long as you have well researched and actionable information, and you make some “safe” money plays…

You can beat hedge funds as a self-directed investor… and if more of the single stocks “hit” … you could crush them.

But owning a sports team?

You’ll need to collect those two and twenties.

 

 

[1] Hedge fund 2023 returns roll in, including Citadel, D.E. Shaw and Point72 | Pensions & Investments (pionline.com)

[2] Historical Average Stock Market Returns for S&P 500 (5-year to 150-year averages) – Trade That Swing

[3] 2023 Hedge Fund Report – A Year in Review – Citco

[4] You Can Shred the Average Hedge Fund by Doing Basically Nothing. Here’s How. (yahoo.com)