Why is it impossible to maintain a positive reward in the stock market every year?

Simply put, positive reward every year in stock investment is impossible!

Table of Contents

Business cycle

The stock market is a leading indicator of economic prosperity and will reflect the overall economic performance of the country in which it is located.

The economic boom will cycle, and the economic boom will directly affect the revenue of the company, and few companies are immune. As long as the company’s revenue fluctuates significantly, the stock price will fluctuate accordingly. The performance of the stock market is basically directly linked to the performance of listed companies, so it is impossible to maintain a constant balance for a long time, or the stock price only rises and does not fall.

Characteristics of stock market investment

A smart person can be the first in elementary school to doctoral class, even postdoctoral research, become a professor, win all academic awards along the way, and even win the Nobel Prize. Whether there are such people, although rare, but obviously, there are.

Of course, there are also entrepreneurial geniuses who start a company, maintain positive business growth every year, and make profits every year.

The same is true in the workplace. Top performers who perform very well usually continue to perform well year after year, and will not suddenly make mistakes and become troublesome employees with extremely poor performance in a certain year.

But in stock market investment, the above-mentioned rules that we are used to in our human society (those with good performance can almost be sustained) do not hold water. What’s more, investors who performed very well in the previous year and have a good return on investment, in most cases, the return in the second year is difficult to sustain; the most typical representative is the manager of a stock market mutual fund people. Here’s why:

Peter Lynch is great
What investors should pay attention to is the annualized rate of return “What investors should pay attention to is the annualized rate of return on investment (IRR)”

In short, mean reversion (you can think of it as gravity) is true in stock market investment.

What’s the reality?

As far as I know, since the existence of the stock market in human history, none of the greatest investors in the world known to have had a positive reward on their investment performance in the stock market every year. If any friends know of the existence of such a master who can prove my ignorance, please let me know. I would be happy to conduct in-depth research on this outlier and share it with all my friends in this blog post.

Hedge fund managers

Many friends must have said disapprovingly that hedge fund managers don’t just go long, they go long in a bull market and short in a bear market, making money on both ends, which is theoretically possible!

In my answer, it would be good to ask a friend who holds this view to name one, but in fact there is none. The reason I think is:

The annualized rate of return of Bridgewater Fund, the world’s largest hedge fund, since its establishment is similar to the annualized rate of return of the S&P 500. Please refer to my post “The career annualized return on investment of top investment masters“
Hedge fund managers are typical believers in timing operations. For details, please refer to my previous article “Why timing the market or band trading simply not work?”
Hedge fund compensation is a typical representative of good and bad returns, and it is difficult to maintain a long-term good annualized return.

Buffett’s view

In his 1985 letter to shareholders, Buffett mentioned the following two factors that would prevent good investors from “continuing” to achieve past success:

One factor probably transitory – is a stock market that offers very little opportunity compared to the markets that prevailed throughout much of the 1964-1984 period. Today we cannot find significantly-undervalued equities to purchase for our insurance company portfolios. The current situation is 180 degrees removed from that existing about a decade ago, when the only question was which bargain to choose.
The second negative factor, far more telling, is our size. Our equity capital is more than twenty times what it was only ten years ago. And an iron law of business is that growth eventually dampens exceptional economics. just look at the records of high-return companies once they have amassed even $1 billion of equity capital. None that I know of has managed subsequently, over a ten-year period, to keep on earning 20% or more on equity while reinvesting all or substantially all of its earnings.

positive reward — credit: positiveperformance1.com

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