How to always beat the S&P 500

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Apr 4, 2009 10:29 am

It seems to me that the smartest guys in the world that have been crushed by the market in the last year typically compare their performance to the S&P and the ones that consistently have better numbers are considered to be little tin gods.

 
It almost seems that the goal is to actually beat the S&P not maximize profits necessarily.
 
I can beat the S&P all the time without exception. I'll bet many of you probably just had a negative response to that statement.
 
How would/could one always beat the S&P every single time?
 
Any takers?
Apr 4, 2009 10:49 am

Fund managers trying to beat the S&P are trying to outperform by buying and holding equities. Trading options and comparing that to buy and hold is comparing apples to oranges. It is two different animals.

Apr 4, 2009 10:52 am

I can beat the S&P with a baseball bat.

 
As long as I can aim well, I can beat it every single time!
Apr 4, 2009 11:11 am
Ron 14:

Fund managers trying to beat the S&P are trying to outperform by buying and holding equities. Trading options and comparing that to buy and hold is comparing apples to oranges. It is two different animals.

 
First I made no such comparison. I use options a lot but I'm not a one trick pony. What is the diff? You made an assumption that I wasn't going to use equities. Why would it matter what product it was if you always beat the S&P without exception?
 
Perhaps I should change the question too. Do you think you could ALWAYS outperform the S&P? If so ... how?
Apr 4, 2009 11:37 am

The benchmark for US Equity investing is the S&P. That is what fund managers are compared to and that is what many compare their investments to. I know you are not a one trick pony, I never said you were, but fund managers and most advisors are not trading anything. They are putting together long term investment plans to help clients reach long term investment goals. Is someone who owns a Mcdonalds franchise and turns a 15% profit each year also a star investor because he beats the S&P each year?

Apr 4, 2009 11:58 am
Ron 14:

Is someone who owns a Mcdonalds franchise and turns a 15% profit each year also a star investor because he beats the S&P each year?

 
Well now you truly are talking apples and oranges. Lets limit this to things you need a series 7 to buy and sell.
 
Do you think you can always beat the S&P? Long term, Short term and in between?
 
If so I would be very interested and appreciate your, or anybodies, methodology to do it.
 
When I tell you how I would do it if that was my goal you'll probably find it amusing at just how simple it is. Sometimes things are sooooooo simple we overlook the obvious.
 
What would you think of a money manager that beat the S&P 10 tears out of 10? I'll bet that guy would be considered to have some serious bragging rights yes?
Apr 4, 2009 12:36 pm

-No, I cannot beat the benchmark every year and it doesn't matter if I do or not

-Yes, managers who beat the benchmark consistently are considered to be at the top of their profession
 
FYI -You do not need a Series 7 to execute options, stock, or mutual fund trades
Apr 4, 2009 12:52 pm
Ron 14:

-No, I cannot beat the benchmark every year and it doesn't matter if I do or not

-Yes, managers who beat the benchmark consistently are considered to be at the top of their profession
 
FYI -You do not need a Series 7 to execute options, stock, or mutual fund trades
 
Semantics & you know what I mean. Yes YOU can easily beat it always.
 
Would you like to know how?
 
I'm curious, if beating the S&P or some such is not relevant to your practice what do you use to gage success in your clients accounts?
 
I know I was a prick when we first began to reply to each others posts ...
 
Sorry
 
The tone of this discussion is not like that at all from my side. I truly am interested in your thoughts and best practices should you decide to share them with us.
 
That goes for everyone that want to chime in.
 
Here is the specific question
 
A guy has 5 million and will give you 1% as long as you consistently beat the S&P. You're not allowed to take risk that exceeds the implied risk of the S&P, within reason. IF the account is off by 2% at anytime you loose the account on the 2% tick.
 
What would you do?
 
ALL ANSWERS FROM ANYBODY AGE GREATLY APPRECIATED
 
 
Apr 4, 2009 1:09 pm

The average investor trails the S&P by about 7% over time because of constantly overreacting at highs and lows so I follow Nick Murray's recommended value prop:


-Will the experience of my firm and myself provide a better return than the investor on their own by 1% or more
-Will my guidance save them from making the big mistake (selling out at dow 6500) and sticking with their plan in bad times
-Will having a trusted advisor save them time, energy, and worry vs doing it themselves
 
I ask the client are any or all of these things worth 1% to you ? If yes welcome, if no, go back to fidelity or CD's and continue to chop yourself up
Apr 4, 2009 1:32 pm

I added more to the post you responded too FYI. How to simply and consistently beat the S&P?????

 
This answer is very anticlimactic.
 
Put all the $$$$ in the SPY and each month sell a covered call that is in the following month for expiration i.e. a May expiration if we did it today. The Delta has to be 0. A delta technically can't be zero, but, a zero Delta means that the probability is in basis points.
 
So using todays number for fun we would be selling the May 103 for .11.
 
If we did this for one year the Calls would give us 1.6%. So we beat the S%P by just over a point and 1/2.
 
How simple is that?
 
So for the purpose of prospecting/talking shop with prospective clients. Set up an account, make it small for your sister or some such, buy 100 SPY. Now you can tell people that one of your more conservative strategies has been back tested for 20 years and is currently exceeding the returns of the S&P.
 
I know it sounds cheesy but I did it and some are greatly impressed by it. AND it's 100% true and without exaggeration.
Apr 4, 2009 1:55 pm

Your forgetting about trading costs.

Apr 4, 2009 1:59 pm

And if you go through the strike, you stop yourself out, and the Index keeps gaining.

Apr 4, 2009 2:00 pm
Sam Houston:

Your forgetting about trading costs.

 
This is in a wrap account that is paying the broker 1% as previously stated. There are no additional fees for any trades.
Apr 4, 2009 2:03 pm
Ron 14:

And if you go through the strike, you stop yourself out, and the Index keeps gaining.

 
IF we were lucky enough to have a black swan enter the picture and goes to a 99%+ probability of success we simply roll the position and 9 out of ten we would get a credit on the roll to add to the till.
 
Out of literally thousands of trades I've done during my 19 month tenure we've not given up any stock we didn't want to.
 
God I love my job. With all the 'stupidity liquidity' bubbles floating around it's easy to take their money
 
As I said in another post. Gaming theory is significantly more useful than anything the training department taught us.
Apr 4, 2009 2:22 pm

Everything your saying makes sense. The thing is it only takes once for that to blow up. There used to be a huge NDX speculator who would sell out of the money call spreads and put spreads one month out.  He did it for about 3 years straight in huge quantity, selling both spreads at the same time. If the futures ever approached the strike he would roll it, but he got caught once where it just kept running away from him and it was game over. Part of it was because of the size he was doing, but it was also because he kept going back to the well and nothing is a lay up forever.

Apr 4, 2009 2:30 pm

I hear what you are saying. Then lets limit it to two trades per year.

 
 
Apr 4, 2009 5:18 pm

All pretty esoteric. Try to get a client to understand what you are doing.
Bill Miller beat the S&P every year....till he didnt. A lot of people bought his fund when he was "at the top of his profession". The rest is history.

I tell cients that i dont care about the s&p 500 - i use the s&p 500 to put their performance in context, but i care more about whether or not they are on track to meet their goals.
As far as investing, i tell them that my goal is to reduce volatility and i will probably outperform in down markets, and underperform in up markets.

Apr 4, 2009 6:10 pm
Sportsfreakbob:

All pretty esoteric. Try to get a client to understand what you are doing.
Bill Miller beat the S&P every year....till he didnt. A lot of people bought his fund when he was "at the top of his profession". The rest is history.

I tell cients that i dont care about the s&p 500 - i use the s&p 500 to put their performance in context, but i care more about whether or not they are on track to meet their goals.
As far as investing, i tell them that my goal is to reduce volatility and i will probably outperform in down markets, and underperform in up markets.

 
I totally agree
Apr 4, 2009 6:57 pm
Sportsfreakbob:

All pretty esoteric. Try to get a client to understand what you are doing.
Bill Miller beat the S&P every year....till he didnt. A lot of people bought his fund when he was "at the top of his profession". The rest is history.

I tell cients that i dont care about the s&p 500 - i use the s&p 500 to put their performance in context, but i care more about whether or not they are on track to meet their goals.
As far as investing, i tell them that my goal is to reduce volatility and i will probably outperform in down markets, and underperform in up markets.

 
This was more thinking out loud and looking for other reps thoughts. Making money is an art form, IMHO, and there are more ways to work the market that my imagination can fathom. Trying to sell this to a client would be ridiculous. As for my current clients about half don't have a clue how I keep making their account balance go up each month. Their comfort level is a facet of their belief that win loose or draw I truly have their best interest at heart, which is 110% true. The other half actively helps me look for trades. I teach them how to do it and go over each trade and place the order.
 
"i tell them that my goal is to reduce volatility"
 
I agree BIG TIME hence my fixation on market neutrality models.
 
Read up on arbing convertible bonds "convertible arbitrage" I think you will be blown away about how you can almost remove volatility and get around 9%+ depending on how your firm's cost or the payment of interest. Bread and butter models for hedge funds. They use technology stocks for the most part as they don't usually pay dividends. Which brings me to another GREAT swing trade. Find convertible bonds that are being called get in and sell on the short squeeze.
 
God I love playing this game.
Apr 5, 2009 12:26 am
Gaddock:
Ron 14:

And if you go through the strike, you stop yourself out, and the Index keeps gaining.

 
IF we were lucky enough to have a black swan enter the picture and goes to a 99%+ probability of success we simply roll the position and 9 out of ten we would get a credit on the roll to add to the till.
 
Out of literally thousands of trades I've done during my 19 month tenure we've not given up any stock we didn't want to.
 
God I love my job. With all the 'stupidity liquidity' bubbles floating around it's easy to take their money
 
As I said in another post. Gaming theory is significantly more useful than anything the training department taught us.



I LOL'd.

That struck me funny.

Good info, but 19 months? I'd be careful who I bragged to about that.