There is generally a saying that you should not use your hobbies to challenge others’ abilities. In other words, there is a big difference between the amateur level and the professional level. In theory, the level of almost the majority of the professionals far exceeds that of amateurs. For example, professional football players, professional scientific researchers, etc.
However, in the field of stock investment, why is the long-term performance of many Wall Street professionals, such as some private equity, not as good as amateurs who buy index funds and hold them for a long time.
Why is this absolute advantage of professionals not so obvious in stock investment? There may be six reasons.
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1. Professional are Not Real Professional
It is difficult to distinguish between luck and ability in the short-term of investment, so many low-level players are also involved in the “professional” team.
2. The Amount is Too Big to Handle
The system of taking management fees for financial management on behalf of clients pushes them toward continuous efforts to get an approach and even break through the upper limit of the amount of funds they can manage, which leads to failure.
3. Blindly to Pursue High ROE
The system of a commission on profits while no sharing of losses guides fund managers to be relatively more inclined to invest on high-risk and at the same time high-return investment targets.
4. Pressure from Fund’s Performance
The ranking of the fund’s short-term performance and retracement data will affect the fund-raising ability, and non-professional fund holders will respond with different feedbacks. This pressure forces fund managers to consider timing, smoothing and speculation.
5. Caused by Fund Investors
The level of fund investors is low, chasing ups and downs. Subscribing a fund after the continuous surge forces the fund manager to buy at a high level. Redemption of the fund after the continuous sharp drop, forcing the fund manager to sell at a low position.
6. Fees Reduce the Fund ROE
The management fees and sharing fees charged by the fund reduce the long-term ROE.
Investment may be the only world, where an amateur can do better than a professional as long as he admits that he is an amateur. In the field of investment, you must recognize your ordinariness before you can achieve your extraordinary.