From time to time, people reach out to me asking what I think about them opening a hedge fund. Typically, the backstory is that they have shocked themselves with their stock market prowess. “Boy, am I good!!!“
Now, they’re wondering if and how to monetize this latent genius. After all, their stock picks earned, say, double what the S&P 500 did over the past few years. Clearly, they are really amazing investors! Isn’t it baal tashchis for them and their potential investors, not to open a hedge fund?
Yeshivish Sports Champ?
Before we turn to stocks, let’s talk about sports. If the biggest masmid in yeshiva told you he’s also an elite basketball player, competitive at the NBA level, you’d be rightfully skeptical. The best dunker in his chabura, or even Lakewood, maybe.
But how can a short, slight talmid chacham, with limited training and practice, compete with gigantic, elite players who spend their entire lives working out and practicing? They have so many athletic advantages over a 5′ 8″ masmid that it becomes borderline impossible to imagine a small, bookish person overcoming the competition.
It’s much more probable that the claimant is underestimating the competition than the chance that his bein hazmanim hobby manifests itself as a miraculous talent for threading balls through a hoop. Although it may not seem apparent, the know-how competition required to be at the top of the “game” of stock trading today is as fierce as professional sports.
Stock Trading Is a Tough Competition, Too
Because of technological shifts, you need to be an elite investor to beat the stock market’s averages significantly over the long run. Financial markets are pretty efficient, meaning it’s hard to find a significant bargain.
Financial transactions are also closed loops, a “zero-sum” game in which every “buy” decision is matched by someone else’s “sell” decision, and vice versa. Therefore, trading stocks is also a competition in which getting an ABOVE-average return requires someone else to take an equivalent BELOW-average return.
The question then becomes, who are you competing against? And what does it take to be smarter, faster, better than the competition?
Unlike the pre-Internet era, when the stock market was populated by Mom-and-Pop investors buying blue chips, 90% of today’s market activity comes from hedge funds, institutional money managers, and billionaire families.
Everyday part-time investors are trading against top professionals with much better research and trading capabilities, and their “winning” in the stock market is as unlikely as competing in the Olympics. And if a random investor is doing far better than the norm, it’s almost always because they’ve luckily won a short-term bet, not a sign of long-term skill.
Confusing Luck and Talent
Luck won’t take you very far in sports, and verifying claims of basketball prowess is easy. A quick game against a professional player, or even tracking a series of his unprotected shots, would quickly cut down on the masmid’s illusions of superior sports ability.
Investments, on the other hand, involve a significant amount of chance. Therefore, especially in the short time frames, it’s easy to confuse luck for skill. In a 1984 talk, Warren Buffett used a coin flipping contest, where clearly no skill is involved, to illustrate this point.
Fabulous Flippers?
Say a million contestants toss up coins with a “heads” flip winning and a “tails” flip causing an elimination from further competition. Purely by chance, thousands will remain eligible at flip 10, and hundreds at flip 15. At toss number twenty, with 999,996 contestants eliminated, the four remaining “great champions of head-sided flips” would face off!
At this point, these “experts” have all written books explaining their special routines and strategies, conveniently ignoring, says Buffett pithily, that an equally large group of monkeys flipping coins would have produced 4 similarly endowed “geniuses!”
While picking stocks isn’t a 50/50 coin-flip endeavor, and people can feel they chose their winners with a process and strategy, it takes a lot more than a few good picks to identify an enduring ability to outsmart all the other investors looking at the same information.
Remember, there are only a couple of thousand publicly traded companies, and all their financial information is public! And by definition, many investors, smart or not, will, with hindsight, end up among the real winners.
Booms Make Everyone Look Smart
As I write this in February 2026, the S&P 500 is up some 16% over the past 12 months. But a simple stock screener (check out it out here) shows that about 32% of large US stocks ($1B+ market cap) grew by 25% for the year, about 18% grew by over 50%, and over 8% of these companies more than doubled in value!
So anyone randomly picking a couple of stocks also had a pretty good chance of beating the S&P 500… at least in the short term! Especially since the winners tend to follow certain thematic patterns.
Because of natural dispersion, among millions of casual stock pickers, many will have earned tremendous profits mainly by chance, feeding their illusions of outstanding skill. It’s mathematically certain, however, that it’s other stock pickers who chose or remained with the BELOW average investment performers, which provided the winners’ short-term ABOVE average investment gains.
Until They’re Wall Street Shark Bait
It’s therefore probable that a non-spectacularly equipped investor’s beating the average had little to do with his cursory research and more to do with blind mazal. Like the “expert” coin flipper whose luck holds out for a while, it will probably end too.
At that point, he may revert to an average long-term return or get eaten up by the Wall Street sharks, his poor performance feeding some hedge fund manager’s bonus. Someone who aspires towards becoming a Bein Hasedorim champion is better off on the basketball court than on a stock trading screen. At least he’ll get some exercise out of it.
Sustaining Ultra-Competitive Performance
Even famous investors with records of outsmarting the average market struggle mightily to stay ahead of this fierce financial competition. Bill Miller of Legg Mason doubled the market returns over a 15-year period, from 1991 to 2005, but then was crushed by the Great Financial Crash of 2008. He ended up leaving his firm after a bunch of years of terrible performance.
Ironically, he’s recovered his wealth and then some by a major early bet on Bitcoin, which made him a billionaire! Miller had to continually fight to reinvent himself and his investment approach to keep delivering blockbuster returns. Is a casual part-timer able to compete with that?
And many successful professional investors eventually give up. John Paulson made BILLIONS just in 2008 by betting against the housing market. He wasn’t much known before that trade and has had disastrous results ever since. This poor record led him to close his hedge fund, leaving people to question whether that trade was a one-time thing. Not that he cares… he’s already got his billions!
So even if a creative yungermahn or other part-timer came up with a unique “chap” for profitable financial trading, I’d still bet that, in the long run, it probably won’t make him much money. Modern stock markets are so competitive that a strategy that works today may not work even next week or the day after. You need to constantly come up with new ways to outsmart Wall Street pros, which is virtually impossible on a casual basis.
I’m not saying it’s impossible. There are exceptions to every rule. But that just proves the rule.
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