BEAT THE COUCH

In 2008, Warren Buffett bet a million dollars that a plain S&P 500 index fund would beat a hand-picked portfolio of hedge funds over ten years, net of fees. Protégé Partners, professional fund pickers, took the other side. Ten years later the index fund had gained 125.8%. The hedge funds averaged roughly 36%. It was not close, and the losers conceded early.

The professionals traded constantly, charged handsomely, and lost to a strategy with no decisions in it at all. This was the couch's finest documented hour.

Sources: Long Bets #362, the official record · Buffett's 2017 shareholder letter (pp. 11–13)

S&P has published its SPIVA scorecard for over two decades. The finding barely changes: over any 15-year window, roughly nine out of ten actively managed US equity funds underperform the S&P 500. These are trained professionals with research teams, Bloomberg terminals and very good suits.

If they cannot reliably beat the index, the couch would like to know what your plan was.

Source: SPIVA scorecards, S&P Dow Jones Indices

That is not our joke; it is the actual title of a famous study in the Journal of Finance. Barber and Odean examined 66,465 households trading through a discount broker from 1991 to 1996. The average household underperformed the market by about 1.5% a year. The most active traders underperformed by about 6.5% a year. The more people traded, the worse they did.

Source: Barber & Odean (2000), Journal of Finance

Javier Estrada studied about 160,000 daily returns across 15 markets. Missing the 10 best days cut final wealth by roughly half; those days are statistical outliers that cluster in the middle of panics, precisely when sitting in cash feels safest. That is why this game bills you for every best day you dodge.

In fairness, the counterargument exists: the worst days hide in the same neighborhoods, which is exactly why timing them apart is so hard. We link both sides; the couch fears neither.

Sources: Estrada, "Black Swans and Market Timing: How Not to Generate Alpha" · Faber, "Where the Black Swans Hide"

Burton Malkiel wrote in 1973 that a blindfolded monkey throwing darts at the stock listings could pick a portfolio as well as the experts. Decades of dart-throwing contests have largely proven him right.

Our audit is that idea made rigorous: a permutation test. A thousand monkeys replay your exact two years with your time in the market and your trade count, on random days. If your result does not beat 90% of theirs, your win was, statistically speaking, a banana.

Sources: Malkiel, "A Random Walk Down Wall Street" · Permutation tests, explained

Daily S&P 500 closes from January 1928 through December 2019: 23,103 trading days. Dividends are included, smoothed daily and calibrated so every calendar year compounds to exactly the annual total return published by NYU Stern. Your cash earns that year's 3-month Treasury bill rate. Fees and taxes are ignored, in your favor.

Source: Damodaran, "Historical Returns on Stocks, Bonds and Bills"