Competing against the market

But to find alpha in this way (outperformance), you arrive at a subset of "being different." To outperform the market, you generally need to be right about something that most people think is incorrect. Because if everyone believes something to be true, it's not being any different; it's just "the market" and there's no alpha in that.

So in this sense, if you want a high degree of relative wealth creation, if you want to retire early with a yacht in Monaco, and you don't want to wait for the decades of compounding to start delivering the bulk of its fruit, then yes, you will likely need to look beyond just the S&P and take on additional risk to get there.

This is the "yes" part. Now let's consider the "no."

It is estimated that about 40% of Americans have no exposure to the stock market, that the wealthiest 10% own roughly 93% of all outstanding stock shares, and that the wealthiest 1% own about 50% of the market. Canada exhibits a similar story of high concentration, although it's less extreme, and Canadians tend to be more invested in residential real estate compared to stocks and business equity.

Regardless, there is a question of allocation. When the market goes up 15%, it doesn't affect everyone equally, and it actually increases overall inequality given the above concentrations. Though if you're competing for a €6M apartment in Paris, you are admittedly competing within your narrow socio-economic band against people who probably have exposure to equity markets.

There's also a behavior gap. If you buy the S&P 500 and hold it for 30 years, you would be an extreme statistical outlier. Most people don't do this. They get emotional, they sell when it falls, and they try to time the market. Here, for example, is a study that found that in 2024 the average equity investor earned 16.54%, compared to the S&P 500's 24.02%.

Despite strong performance in the equity markets, investors continued to underperform due to their behavior. Withdrawals from equity funds occurred in every quarter of 2024, with the largest outflows taking place just before a major return surge.

So even if you are just buying the S&P 500, there are still ways to be different and achieve relative outperformance. You just have to be patient and have the right temperament.

That said, even if you were extremely disciplined and you behaved for, say, 30 years, it would still be mathematically impossible to achieve something like Elon Musk-level wealth. You could be a multimillionaire with Monaco yacht level wealth, but not a centibillionaire. For that, you'll need to actively take on more risk and, yes, outperform the market.

Cover photo by Sean Pollock on Unsplash

But to find alpha in this way (outperformance), you arrive at a subset of "being different." To outperform the market, you generally need to be right about something that most people think is incorrect. Because if everyone believes something to be true, it's not being any different; it's just "the market" and there's no alpha in that.

So in this sense, if you want a high degree of relative wealth creation, if you want to retire early with a yacht in Monaco, and you don't want to wait for the decades of compounding to start delivering the bulk of its fruit, then yes, you will likely need to look beyond just the S&P and take on additional risk to get there.

This is the "yes" part. Now let's consider the "no."

It is estimated that about 40% of Americans have no exposure to the stock market, that the wealthiest 10% own roughly 93% of all outstanding stock shares, and that the wealthiest 1% own about 50% of the market. Canada exhibits a similar story of high concentration, although it's less extreme, and Canadians tend to be more invested in residential real estate compared to stocks and business equity.

Regardless, there is a question of allocation. When the market goes up 15%, it doesn't affect everyone equally, and it actually increases overall inequality given the above concentrations. Though if you're competing for a €6M apartment in Paris, you are admittedly competing within your narrow socio-economic band against people who probably have exposure to equity markets.

There's also a behavior gap. If you buy the S&P 500 and hold it for 30 years, you would be an extreme statistical outlier. Most people don't do this. They get emotional, they sell when it falls, and they try to time the market. Here, for example, is a study that found that in 2024 the average equity investor earned 16.54%, compared to the S&P 500's 24.02%.

Despite strong performance in the equity markets, investors continued to underperform due to their behavior. Withdrawals from equity funds occurred in every quarter of 2024, with the largest outflows taking place just before a major return surge.

So even if you are just buying the S&P 500, there are still ways to be different and achieve relative outperformance. You just have to be patient and have the right temperament.

That said, even if you were extremely disciplined and you behaved for, say, 30 years, it would still be mathematically impossible to achieve something like Elon Musk-level wealth. You could be a multimillionaire with Monaco yacht level wealth, but not a centibillionaire. For that, you'll need to actively take on more risk and, yes, outperform the market.

Cover photo by Sean Pollock on Unsplash

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