🧠 How Do I Make Money In Stocks?

Unfortunately, there is no simple process for security selection. There is a simple explanation why this is true.

Why edge disappears when trades become crowded

Suppose someone finds a simple tip that allows them to make money buying a specific type of stocks. Suppose they share that tip with others. Then the price of that type of stock will rise. People will have to pay the more money to get the same return they would have gotten before. Suddenly, this type of stock is no better than any other type of stock because it has become overpriced.

The general rule in the securities markets is that if there is any tip that can be used to find securities that will outperform, then people will flood into that type of securities until their price is driven up so high that you can’t make money with them anymore.

For this reason, no trading system that 1. is publicly known and 2. can be easily replicated at large scale ever be successful over the long run. This means that any system that you find in a book (or anywhere else) either doesn’t work over the long term or doesn’t scale up very well (or some combination). If you ever find a system that gives you an “edge” in trading, you should be prepared for that edge to disappear as other traders find it and the trade becomes crowded.

Why does it appear that people are making money in the stock market?

At any given time, some people are making money and others are losing money. In general, you hear more from the people who are making money. This is known as “selection bias” and it can give the false impression that it is easy to make outperforming trades with stocks as a retail investor.

Naturally, many investor in the stock market will typically tend to make money because of the general upward trend of stock prices. However, the question is whether they can outperform a simple and sleepy investment in a stock mutual fund. Also, how does their return hold up when it is adjusted for any increased levels of risk that they may have taken on?

How do we know that the active traders aren’t outperforming the market as a whole?

https://web.stanford.edu/~wfsharpe/art/active/active.htm