Traders compete with invisible opponents

Trading stocks has become hugely popular, but it’s rarely a fair fight. The reality is, traders' opponents are often professionals with inside information, powerful tools and years of experience. For most investors, that’s a battle they’re unlikely to win.

As William Bernstein puts it, trading is like playing tennis without seeing the opponent—only to find out you’ve been hitting against a Grand Slam champion. You don’t know who’s on the other side of the trade, and that’s exactly the problem.

In this video, Bernstein explains why confidence alone isn’t enough, and why the best investors focus less on being clever and more on being consistent.

Three key takeaways:

1. You’re trading with professionals

Behind every trade could be an expert investor or insider who knows far more than you do. That’s not a level playing field.

2. Confidence can be misleading

Most traders believe they’re better than average, but the research says otherwise. Overestimating your ability is a recipe for poor decisions.

3. Discipline beats intelligence

You don’t need to be brilliant to succeed at investing. Staying the course with a low-cost, disciplined strategy is often your best advantage.

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Transcript

Robin Powell: Trading stocks has become very popular in recent years, but the vast majority of traders receive lower returns than they would if they simply invested in a low-cost index fund. 

Why? Because it’s very hard.

As William Bernstein wrote in his book, The Four Pillars of Investing: “Trading individual stocks is like playing tennis against an invisible opponent; what the investor doesn't realise is that he's volleying with the Williams sisters."

William Bernstein: Well, we tend to think of trading stocks, especially buying stocks as a sole activity. You know, kind of like ballet. You're just out there performing. But in fact, it's a one on one competition. And the analogy which you just referred to is not just that you're following against the Williams sisters, it's that the Williams sisters are on the other side of the net but you don't know they're on the other side of that. 

You can't see who's on the other side of the net. You don't know who you're buying from when you buy a stop or who you're selling to when you sell the store to. And so what you're not realising is the person on the other side of that net is not some, you know, idiot dentist from Peoria who doesn't know what he's doing.

The chances are that person has a name like Goldman Sachs or PIMCO or Warren Buffett or that's not even the worst case scenario. The worst case scenario is that you're trading with the CFO of the corporation who knows more about that company than anybody else on the planet. You don't want to be trading with any of those people. 

RP: Most traders, in other words, are overconfident.. and that shouldn’t surprise us.

Behavioural psychologists have repeatedly shown how human beings are naturally prone to overestimating their own abilities.

WB: We all think that we're better drivers than we actually are. At 80% of the population. They're an above average driver, which is a mathematical impossibility. And more generally, we all think that we're better liked and better looking and more pleasing than we actually are. And it's just to have a lot of humility about all those things, and particularly to have a lot of humility about your ability to pick stocks or even for that matter, which to pick asset managers.

RP: As William Bernstein says, trading stocks is highly competitive.

Most of us would struggle to compete with the professionals on skill or knowledge.

But the good news is, we don’t need to outsmart them at all.

WB: Finance isn't a process or game in which the person with an IQ of 160, 170 wins. In fact, most of the time the person with the IQ of 170 doesn't beat the person with the IQ of 130. The real way that you win the game is to have more discipline.

RP: In summary, be humble. You’re not Warren Buffett, and you’re highly unlikely to outperform through stockpicking or market timing.

But being patient and disciplined will give you a decisive edge.

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