Thread by @borrowed_ideas

1/6 Thread: Myth of the "average" investor

One of the common misperceptions I think is many believe they just need to be better than the "average" investor to beat the market in the long-term. The reality is very, very different.

Let me explain.

2/6 Imagine 10 people started actively managing their money today. They all have $100. They invest for 30 years and they all generate different return over that period.

Three got completely wiped out. Five people generated between 1% and 5% CAGR.

3/6 Of the initial 10 people, you have 8 of them who have generated anemic returns over 30-yr period.

If you make better than 5%, you will be among the top 20 percentile. You can also *feel* much better than the average investor.

4/6 Wait a minute. We have still two people left.

It turns out one of them is reincarnation of Warren Buffett. That person makes an eye-popping 25% CAGR.

What about the one other person? He/she makes a respectable 12% CAGR over the same period.

5/6 The initial pool of capital of $1K for these 10 people would be 85x over 30-yr period, implying 16% CAGR.

Alas, only one person would beat the market in this scenario. Here's what it looks like.

6/6 Investor "A" made >2x higher CAGR over 30-yr than 80% investors in this hypothetical market, yet underperform the "index" by ~400 bps.

So if you are actively managing your money, your competition isn't the "average" investor. It's typically the best of the best.

P.S. if the image appears black on your screen, here's a cleaner version.