From my essay, Inreality.show …
Does fundamental investing work? Not so much. Everyone has the same information, which means “the fundamentals” are already priced in, so you can’t get an edge by studying reports and analyses. Stock market investing is a game of wolves and sheep, where the wolves are those with a computing and algorithmic or data advantage, and the sheep are all the rest of us. Hedge funds are in an arms race to create profitable algorithms, and now most of those funds have reached the same plateau. Even Warren Buffett says he can’t beat the market (and hasn’t in over 20 years). Those who have an edge over the market usually make money until their edge disappears, often surprisingly quickly. The problem is skewness, which you can understand from reading this technical paper or by reading The Black Swan, by Nassim Taleb. My favorite book on investing is A Man for All Markets, by Ed Thorp.
So how should I invest? Passively. Most of us mortals can’t generate alpha, so it’s better to capture beta. That means take advantage of the average gains of various asset classes. Have exposure to global markets, real estate, and inefficient asset classes. Try to find “smart beta” opportunities. As Eliezer Yudkowsky says, “An efficient market is one where smart individuals should generally doubt that they can spot overpriced or underpriced assets.” Most markets are very efficient. If you can pick the winners ahead of time, by all means give it a try. You might get lucky.*
For a quick summary, read this excellent blog post by Paul Glance, PhD.