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How to beat the market by @_FI_Trader Part 1

Mar05

How to beat the market by @_FI_Trader Part 1

Football Index have their official measure of the size of the market known as the FOOTIE.

 

But after years of asking, we’ve only ever really extracted vague explanations from FI about exactly how it is calculated. And if I don’t understand it, I don’t want to use it.

 

FI Market Cap’s method for measuring the performance of the market is much more useful because we know how it’s made. It’s a consistent marker that we can measure our performance against.

 

With the launch of this new site, I was asked to write an article about why exactly measuring our performance matters.

 

It’s an important topic that I don’t think we as traders think about enough.

 

It would be very easy to think we are all amazing traders.


Making money has been easy at times. Maybe too easy.

 

That can get us into sloppy habits that will be costing us money now without us even realising. The rising market can gloss over a multitude of trading sins.

 

And as FI matures and establishes as a mainstream product, it’s going to get tougher and more competitive.

 

If we are making some money now but only just keeping pace with the market, that’s a warning sign.

 

If so, we must have real weaknesses in our trading game and now is always a good time to fix them.

 

A good trader should be comfortably beating the market now, not just bumping along with it.

 

A good analogy is the online poker boom in the mid 2000’s. It was new and fresh.

 

Online Poker rooms were awash with enthusiastic and mostly bad poker players. Even an average player could make some decent money. The best ones who really worked on their game could make a lot of money.

 

But over time, it got tougher. More and more good players got even better and started cleaning out the bad ones who hadn’t bothered to improve and were just relying on the easy conditions to profit.

 

New markets aren’t much different to that.

 

FI too will get more and more competitive over time, and if you plan to still be trading in 5 years time (I know I do!) we’ve got to keep improving and make sure we are performing well relative to the market.

 


 

How do we know whether we are any good?

 

I think this lingers at the back of the mind of many a trader, certainly does for me.

 

That’s why having some hard data on it is really useful.

 

Without it, we can doubt ourselves or read too much into unreliable ways of measuring success.

 

The first thing we will obviously look at is whether we are making money.

 

Unless we are doing something really special, we’ll probably be making at least some money in what has been a very kind market in the last few years.

 

But are we just being carried by the market? or are we really making good decisions?

 

For example, over the season to date from 1 August 2019 to the start of February 2020, the market rose by 42.4% according to FI Market Cap.

 

That’s the level we need to be hitting so far this season before we’ve done any better than mindlessly buying 1 share in every player.

 

Now, if you told most people they could be making 42% returns for doing very little, they’d snap your hand off.

 

But in FI terms, that’s a poor result. Far greater profits are possible now and we’re leaving them on the ground.

 

Worse, if we are only hitting that level, it means our profits have little to do with our own ability and a lot to do with the rising market.

 

That means we are almost certainly going to struggle and lose money when the market goes through more competitive phases.

 

Another thing we naturally do is compare ourselves to others. This doesn’t always help.

 

For a start, people on social media, like any gamblers, tend to make a big deal of their wins and losses tend to get swept under the rug.

 

Screenshots of winnings can be faked. Portfolio’s can be manipulated or “window dressed” to remove loss making trades and show far more profit than has been the case.

 

We shouldn’t spend too much time worrying about this.

 

Unless you can see full histories of what selections were made and when and can review them later to see how they turned out it’s pretty meaningless.

 

Very few people have that. I do and you can see the results from my pre-season analysis here. But I’m one of the very few people with a reason to do that since it all gets archived in the members area of my website.

 

But whilst that article has some interesting observations, it’s more about learning what I can from my successes and mistakes than it is about showing what profits were possible.



We should spend our time trying to beat the market, not other individuals. It’s a much more consistent measure.

 


 

What does success look like?

 

To flesh this out, I’ll use some examples from my own trading from last season and then move on to this season too.

 

On the opening day of the 18/19 season, I started my New Trader Challenge.

 

Plenty at the time were wondering if they had missed the boat and it was too late to start FI (that seems silly now!). Or they’d say they didn’t have the time or enough money to invest to make it worth it.

 

So, beginning with a £1,000 balance on the first day of the season, I challenged myself to show how you could make a good profit starting from day 1 of the new season with:



- no use of bonuses
- a blank portfolio without the benefit of long term holds, and;
- a time efficient style that didn’t require constant phone checking or watching every game.

 

I publically blogged my decisions along the way throughout the season, so readers could see the selections and then we’d measure how they got on in the weeks and months that followed.

 

Between August 10th 2018 and the 31st May 2019, the portfolio rose by 220.9%, turning the initial £1,000 into £3,209 in 10 months.

 

That’s a big number. Though, if you compare it to the rise in the market over the same period which was 108.4%, it becomes clear that I can’t take the credit for all of that.

 

With this portfolio, I outperformed the market by 112.5% in that period.

 

That’s the real sign of success because I can say that’s down to my own decisions. I also did it with no direct use of bonus cash, and stuck to the time efficient goal - it required just 40 trades all season.



Had we gone on social media and claimed a rise of 108% in that season, many people might think that it had done well. But that is actually a warning sign - if I only made 108% in that season I’d call it a massive failure.

 

That might sound harsh but it’s also fair. I wouldn’t have done any better than the guy just buying 1 share in everyone. My own decision making would have got me nowhere and that’s nothing to be proud of.

 

All that said, are we a failure if we didn’t make 200%+ in that year? Absolutely not.

 

If we have made 200%+ we should be very proud of it and it shows a very high standard that not everyone needs to compare themselves to.

 

At that level, we’ll be getting most trades right. We’ll still have some that don’t go our way, but we are cutting most of them off before they hurt us too much.

 

Anywhere between 150-200% could be counted as a very good performance. We’ll have been making good decisions most of the time, but we likely have a few areas where we could improve significantly.

 

125-150% would be ok. We’re obviously making some significant mistakes that are holding us back, but we’re making good decisions too.

 

Anything below this I’d consider an underperformance.

 

If we’re just holding pace with the market we’ve clearly got some real problems to work on.

 

If we’re actually doing worse than the market in a very kind year, we need to really consider whether we have the skills, time or mindset to be really profiting on FI in the long term.

 

We may be better off just buying the tracker at this point unless we plan on investing serious time into improving.

 


 

This Season

 

Interestingly, despite the general perception of the current season as being a “tougher” season than last, it’s actually not too much different so far.

 

From August 10th 2019 to February 11th 2020, the market has grown by 39%. It grew by 44% over the same period last season. So a little tougher but not by much.

 

For numbers on this season, I look to my Pre-Season Predictions - Where are they now? article. The details of how this is made up is in that article.

 

Basically, I went through every player I’d discussed in the members area on www.footballindextrader.co.uk in pre-season (July to the first game in each league).

 

I sorted them into players I was positive, neutral and cautious on. Then measured how they had performed by December.

 

It’s a harsh measure that underestimates real performance because it’s taken from the first definitive statement I make about a player.

 

So if I was positive about a player in June, I had to hold them all the way to December. I couldn’t change my mind based on new information.



Obviously I did do that and updated my player reviews weekly to optimise results. But at least this way it’s consistent and relatively easy to measure.

 

The 44 players with positive reviews averaged an 81% profit. None of them made a loss.

 

The 53 players with neutral reviews averaged a 26% profit, with 34% taking a loss.

 

The 56 players I was cautious on had an average loss of -2.92%, with 68% of them worth less by December. (Bear in mind these were almost all popular picks at the time, not obscure ones).

 

Over this same June to December time period, the market rose by 56% according to FI Market Cap.

 

So, even assuming no trading at all after the initial purchase of the positively reviewed players in June to December, this group outperformed the market by 25%.

 

Much better than that was possible with active trading.

 

For the neutrals, it’s a significant underperformance, 30% behind the market.

 

And for the popular social media hyped players I was cautious on it’s a damning result: underperforming the market by a whopping 58.92%.

 


 

Up Next In Part Two!

 

I’ll be writing a follow up to this post soon.

 

I’ll share the two key factors that lead to a portfolio not just beating the market but smashing it.

 

And I’ll discuss the two biggest mistakes that held me back when I first started FI.

 

Follow myself @_FI_Trader and @FiMarketCap on Twitter to be notified when it’s out.

Thanks for reading!