307: How to Beat the Market

This is the Monday Medley, a newsletter that goes out, you guessed it, every Monday. I republish it here for sharing and referencing, but if you'd like to sign up you can do so right here:

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Happy Monday!

First off, Building a Second Brain is open for enrollment. This is by far the most useful course I've ever taken (online or off) and if you've ever thought about taking it, you should do it. It's fantastic. I owe much of my current knowledge management practice to Tiago and his course.

Second, I was on the Delphi Digital podcast talking about Crypto Raiders and Web3 gaming last week. It was a great conversation and worth checking out if you're interested in that area.

I also published an in-depth guide to staking and earning yield on your ETH.

And I published my notes from "The Structure of Scientific Revolutions" by Thomas Kuhn.

How to Beat the Market

"You can't beat the market" is excellent advertising for index funds. And if you read personal finance books like A Random Walk Down Wall Street, the premise seems compelling.

Most traders, even professional ones, do not beat the market on average over long time periods. Therefore, you will most likely not beat it either, so you should sit back and buy index funds.

This idea is nonsense, and I'm impressed it's become so pervasive. But it does touch on some latent desire for freedom from responsibility. We like to be told our fate in complicated areas is not in our hands, so we can abdicate our decision-making to some trusted Higher Power. Save us Jack Bogle!

"You can't beat the market" is an encapsulation of a broader idea: You are unlikely to grow your investing portfolio by more than the market beta over a long time period. And odds are that if you're actively trading and stock picking, you'll do worse.

This is objectively true. We have ample data to prove it, and I have no problem with that longer concept. My problem is the concatenation: "you can't beat the market."

Let's first replace "investing portfolio" with "wealth." You can absolutely grow your wealth faster than the market beta, otherwise there wouldn't be new wealthy people. Wealth is magical because we can create it out of thin air, without taking anything away from anyone. When I write one of these newsletters, I'm creating something valuable that someone could pay me for. I haven't "taken away" someone else's newsletter. I've created something. Wealth is created every day.

You beat the market by growing your wealth faster than it would grow sitting in index funds. For most people, this is extremely easy. It's only hard once you're managing large amounts of money (say, north of 1m).

Here's a simple example. You're a freelance marketer with $100,000 in index funds. You can bill your time at $100 an hour. You have an idle $10,000 sitting in a savings account that you're trying to decide what to do with.

You could put it into index funds, where it will earn a whopping $700 (we'll use 7% annual return as our average here). So if you can turn that $10,000 into $10,701 over the course of a year then you've beaten the market.

Well, how might you do that? Say you work from home, and you lose 2 hours a week to various cleaning tasks that you could outsource. You pay someone $100 to come in every Monday morning and clean up, saving you those 2 hours which you can put back into work.

You're losing $100, but you should be making an additional $200, for a net of $100 per week or $5,200 per year. So now you've turned your $10,000 (technically, $5,200, since that's all you spent on the cleaning) into $15,200. Instead of a 7% return, you got a 52% return. You beat the market!

If you know how to turn time into money, this type of investment is extremely powerful. Any way you can spend money to buy time to put towards higher earning activity will be ROI positive.

But what if you're salaried? I'd argue it's always worth figuring out how to turn time into money since that's how you start unlocking ways to beat the market. But you can also invest in making your salaried time more valuable.

Most jobs won't pay you more if you do better, so you have to find a higher paying job. The easiest way to do that is to make your time more valuable. If you're a Web2 engineer, you could go through a program like Shipyard (investor) to transition to Web3, where you can probably charge quite a bit more since there are so many fewer Web3 engineers.

Shipyard is an ISA, but even if it cost $20,000 that would probably still be a market-beating activity. If you're used to earning $120,000, and then you spend $20,000 but your salary goes up to $180,000, then after taxes you just added ~$42,000 a year in salary, on a $20,000 investment, but which will continue to pay you every year so you got way more than 100% ROI. You beat the market by a long shot!

I haven't done the precise math on this, but I'd argue that until you're making mid six figures, it's probably a better ROI to spend extra cash on increasing the value of your time than on index funds.

That could be skilling up to a more valuable profession, learning a valuable freelancing skill, starting a business, whatever it is, on a 5-10 year timeline you'll probably do much better than you would if you put even 20% of an $80,000 salary into index funds.

Say you have $60,000 left after taxes. Then 20% of that in index funds is $12,000 a year. You'd have $173,000 in 10 years which is a lot! But only $53,000 of that is from the market returns.

Could you, over 10 years, turn $120,000 into more than $173,000? If you're here reading this then the answer is yes. You can. You might start off by losing a lot of it, but once you get your 1,000 days in you would certainly destroy the market returns.

If your portfolio is in the millions then it gets a little harder. And you'll probably want to put other people's money at risk at that point for a cut of the upside instead of putting your own at risk. But you can cross that bridge when you come to it.

Until then, you can absolutely beat the market. People do it every day. You just have to think a little outside the VTSAX.

There's another discussion to be had here about timing. Buying stocks on the public market is basically just a way to be exit liquidity for angels, VCs, banks, and buildooors. Being earlier is a great way to beat the market. But we'll save that for another time.

Have a great week,

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