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I think I know what you intend to say. What you actually said, however, isn't quite right.
For EVERY SINGLE dollar invested that "beats the market," there is a corresponding dollar invested that "loses to the market" because arithmetically speaking adding together the returns both market-beating dollars invested and market-losing dollars adds up and averages to -- surprise -- the market. This is not fictional Lake Wobegon where everyone is above average.
There are plenty of people who attempt to beat or outsmart the market. By definition, some will beat the market and some will lose to the market.
Here's the thing: for people who beat the market, is it luck and hence irreproduceable? Or is it skill and hence reproduceable? For people who lose to the market, is it bad luck? Or is it bad skill?
The best study I'm aware of is that of professors Eugene Fama (University of Chicago Booth School of Business & Nobel Prize in Economics) and his long-time collaborate Ken French (Dartmouth). Here is their paper: http://mba.tuck.dartmouth.edu/bespen...Skill-JF10.pdf Please note the above paper, which answers the "Luck vs. Skill" question, is pretty technical stuff. You need a bit of math and you need a fair understanding of modern portfolio theory.
Thankfully, there here is a summary intended for mere mortals (people not in a PhD program in Finance): https://famafrench.dimensional.com/e...rformance.aspx . Most of us on C-D in the Economics forum can read this summary and learn a thing or two.
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TL;DR
The short answer is some pretty cool statistical analysis of mutual fund returns shows that the vast majority of "beat the market" returns are, indeed, explained by luck. There are a tiny sliver of market beaters who appear to do so from skill. In whole, once you take into account the fees charged by professional mutual fund managers, the fund managers win and the investors lose.
To beat the market, you've got to take on additional risk. Of course , it could go the other way too. My sector portfolio significantly outperformed the market back in the 80s and 90s.
This time it will be housing, student loans, autos, credit card, national/state deficit, pensions, unemployment, immigration, trade wars, and de-valuation of the $/stagflation all at the same time.
Get out your umbrella and rain boots!
I have a friend who works in the finance industry, and this is what he said on the subject:
Quote:
Largest area of growth in the finance industry has been in rate swaps, a popular derivative.
Banks finance variable rate loans, the borrower is up-sold a fixed rate loan. The lending institution offered the variable rate (for example sake) of let's say pegged at 3% for a fixed rate of 4.5%.
Institutions make money as long as the Fed keeps rates at below 4.5%. Once that flip happens, the losses become exponential at a rapid pace.
This time it will be housing, student loans, autos, credit card, national/state deficit, pensions, unemployment, immigration, trade wars, and de-valuation of the $/stagflation all at the same time.
Get out your umbrella and rain boots!
Student Loans bubble has already been deflated. The trend is now a lot of Gen Zers are "enrolled" but only part-time and at very cheap schools, and later in life (not starting at age 18). Quantity over Quality. Also with the refinancers in market you'll have far fewer defaults due to much lower monthly payments and unemployment protection that a lot of these refinancers offer. Credit Unions have got in the student loan game increasingly to add to their portfolio at a conservative rate, this spreads the risk more evenly amongst Regional vs National vs Local banks which lessens the impact at any one level of financial institution.
Housing - Nope. We're not exactly repeating that because Millennial home ownership is low relative to Boomers at the same age. Mortgage interest rates have been low a while now so risk of default is also lower.
Autos - Yes Autos will be disastrous but not enough to tip the economy over as much as the Sub-prime Mortgage crisis. The Auto market simply isn't big enough volume wise.
Credit Card - We're over-leveraged again but Banks have reacted much quicker this time around and credit risk management along with Balance Transfer marketing has been proactive. This will lower delinquencies and bankruptcies significantly.
National/State Deficit - Some states will continue to have austerity problems but the big ones will not have any shortage of funding (NY, CA, FL, TX etc.) and overall from a National/Federal perspective we can just print more money and kick the can down the road. There is nothing other countries can do about our debt - Because they are in debt as well. Japan will never sell it's U.S. Debt holdings and we will never cease being a military presence in the area. At least not for the next 50 years. This is quid pro quo. In addition, due to self-imposed problems Japan needs the U.S. trade wise much more than China does.
Pension Defaults - It depends on how this rolls but this is the one that could tank the whole economy. But it falls under National/State Deficit to a certain degree. If you have a pension from South Carolina I'd say you're more in danger of losing it than if you have one from NY State. It's too late for some but if you're counting on a pension from a fiscally insolvent State with imminent budget problems and constant bickering over federal funding good luck receiving it.
Unemployment - The impact will be lower to Gen Z because their student loans will be lower, and they are more comfortable with a minimalist and communal lifestyle. If the stock market is already pricing that in it can't fall much lower.
Immigration - This is more of a political/social issue than economic. Unless we have some Draconian ban on Mexicans and Central Americans everything is going to continue going as it has been in the past 25 years. They will come work here for 10 years then either choose to stay or go back home. Many of them are preferring to go back home these days, chiefly for ECONOMIC reasons.
Trade Wars - China does not have the upper hand, many tariffs will be reversed after the buffoon leaves office and the terms of engagement will benefit us more (slightly) because China's fundamentals are not good right now. Too much shadow banking and over-leveraged corporations, bad corporate debt, over-valued real estate etc. The Yuan/RMB is being devalued well that is setting us up for proper expectations. Because the real value of China's economy is 65% of what is actually advertised, at best. The last numbers I checked they are headed towards 400% Debt to GDP by 2021. That works if you have 6%+ growth each quarter. Guess what - if only 2/3rds of that growth is real and you're about to slow down - 400% Debt to GDP does not work. China can potentially tank the global economy IF Europe and USA investors have been dumb enough not to already price in what I've mentioned above.
Stagflation - Cannot happen fully without rising oil prices which leads to high inflation on goods/commodities, this is how China is still alive partly because they are getting in closely with the Middle East and working on that transcontinental pipeline.
Devaluation of the Dollar - This is limited because rich foreigners want to keep their money here. With Brexit, they certainly aren't going to keep it in the UK. This is international oligarch back-up safe haven. The dollar can only devalue but so much.
Uh, I'm pretty sure Dave Ramsey's business does not borrow money.
The pot of gold for every farmer is to not have to borrow operating cash. Young guys starting out have to hock everything. Buying out sibling interest in the farm means taking on a lot of debt. There are still farms out there with no mortgage and no operating debt, but only established farms.
I have a buddy who runs a car repair garage who doesn't borrow either. Every year he is faced with what to do with half a million bucks. If he takes it as income, he has to pay income tax on it, so he looks for some way to reinvest in the business. Sometimes he just gives up and pays taxes on the money.
The pot of gold for every farmer is to not have to borrow operating cash. Young guys starting out have to hock everything. Buying out sibling interest in the farm means taking on a lot of debt. There are still farms out there with no mortgage and no operating debt, but only established farms.
I have a buddy who runs a car repair garage who doesn't borrow either. Every year he is faced with what to do with half a million bucks. If he takes it as income, he has to pay income tax on it, so he looks for some way to reinvest in the business. Sometimes he just gives up and pays taxes on the money.
Yeah that’s not uncommon for a lot of businesses. I know for me, it has been an advantage to long term wealth growth to live far below my means so that whenever I had large amounts of cash, I could roll it back into other investments whether that was using things like the Qualified Opportunity Zone situation now or even where we just plowed profits into upgrading buildings and didn’t take much as profit. It sucks sometimes in the short term but it works for seeing your net worth rise faster if you can keep your personal expenses down and reasonable.
Americans are in over their heads again. Can the economy continue to grow while consumer debt is at an all time high?
Remember: GDP = C + I + G + (X - M)
If 2/3rds (66%) of U.S. GDP is in "C", then we are in big trouble when consumers/households stop buying elastic goods.
Luckily the Houston economy was untouched by the 2009 recession, so I was still spending unlike the rest of America. I had to make cutbacks during the 2015 oil bust (e.g. switching TV service from cable to antenna), so I haven't been spending like I used to after adopting minimalism during the mid-decade oil bust (and obviously won't be spending like I was back in 2009).
Student Loans bubble has already been deflated. The trend is now a lot of Gen Zers are "enrolled" but only part-time and at very cheap schools, and later in life (not starting at age 18). Quantity over Quality. Also with the refinancers in market you'll have far fewer defaults due to much lower monthly payments and unemployment protection that a lot of these refinancers offer. Credit Unions have got in the student loan game increasingly to add to their portfolio at a conservative rate, this spreads the risk more evenly amongst Regional vs National vs Local banks which lessens the impact at any one level of financial institution.
Housing - Nope. We're not exactly repeating that because Millennial home ownership is low relative to Boomers at the same age. Mortgage interest rates have been low a while now so risk of default is also lower.
Autos - Yes Autos will be disastrous but not enough to tip the economy over as much as the Sub-prime Mortgage crisis. The Auto market simply isn't big enough volume wise.
Credit Card - We're over-leveraged again but Banks have reacted much quicker this time around and credit risk management along with Balance Transfer marketing has been proactive. This will lower delinquencies and bankruptcies significantly.
National/State Deficit - Some states will continue to have austerity problems but the big ones will not have any shortage of funding (NY, CA, FL, TX etc.) and overall from a National/Federal perspective we can just print more money and kick the can down the road. There is nothing other countries can do about our debt - Because they are in debt as well. Japan will never sell it's U.S. Debt holdings and we will never cease being a military presence in the area. At least not for the next 50 years. This is quid pro quo. In addition, due to self-imposed problems Japan needs the U.S. trade wise much more than China does.
Pension Defaults - It depends on how this rolls but this is the one that could tank the whole economy. But it falls under National/State Deficit to a certain degree. If you have a pension from South Carolina I'd say you're more in danger of losing it than if you have one from NY State. It's too late for some but if you're counting on a pension from a fiscally insolvent State with imminent budget problems and constant bickering over federal funding good luck receiving it.
Unemployment - The impact will be lower to Gen Z because their student loans will be lower, and they are more comfortable with a minimalist and communal lifestyle. If the stock market is already pricing that in it can't fall much lower.
Immigration - This is more of a political/social issue than economic. Unless we have some Draconian ban on Mexicans and Central Americans everything is going to continue going as it has been in the past 25 years. They will come work here for 10 years then either choose to stay or go back home. Many of them are preferring to go back home these days, chiefly for ECONOMIC reasons.
Trade Wars - China does not have the upper hand, many tariffs will be reversed after the buffoon leaves office and the terms of engagement will benefit us more (slightly) because China's fundamentals are not good right now. Too much shadow banking and over-leveraged corporations, bad corporate debt, over-valued real estate etc. The Yuan/RMB is being devalued well that is setting us up for proper expectations. Because the real value of China's economy is 65% of what is actually advertised, at best. The last numbers I checked they are headed towards 400% Debt to GDP by 2021. That works if you have 6%+ growth each quarter. Guess what - if only 2/3rds of that growth is real and you're about to slow down - 400% Debt to GDP does not work. China can potentially tank the global economy IF Europe and USA investors have been dumb enough not to already price in what I've mentioned above.
Stagflation - Cannot happen fully without rising oil prices which leads to high inflation on goods/commodities, this is how China is still alive partly because they are getting in closely with the Middle East and working on that transcontinental pipeline.
Devaluation of the Dollar - This is limited because rich foreigners want to keep their money here. With Brexit, they certainly aren't going to keep it in the UK. This is international oligarch back-up safe haven. The dollar can only devalue but so much.
I agree with you. There are signs that a recession is going to happen, plus we can't have an economic expansion forever. All recessions are usually different, so it will be interesting to know what it is this time. Usually its the sector that you think is "strong" that turns out to be a house of cards and a bubble. Everyone in 2006 thought housing was doing well, and in 1998 everyone thought tech was the next big thing.
My impression is it may be education, tech (again), healthcare, or a sector that no one really pays attention to like natural resources.
Government debt is too long term a thing to cause a short term recession Imo.
I'm going for less bad then the last one. But really just a guess and based on historical trends. Trade war and state level budget issues present some unknowns. I think higher ed and the auto industry may have some issues as well.
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