Before you read any further, I would like you to focus on the image below and think for a minute or two if there is a pattern in what you see.
Like me, probably you have not. But… I ensure you that these lines were drawn by a mechanism that follows a given set of laws of physic: the double pendulum
If you know the geometry of this pendulum and the forces acting on it then, with the right background, you will be probably able to have a given set of equations to describe its motion and its apparent randomness.
In my opinion, the financial market is as random as a double pendulum. Meaning: it is not; or better not fully. I wrote a couple of articles in the past on how the value of Gold and the S&P500 can be modeled knowing the fundamental blocks of the American economy. Without sudden external forces or changes, the direction of the movement of the pendulum, market value and gold can be forecasted with a good degree of accuracy.
Going back to finance.
If you like investing in stocks and you are good at picking them up then probably in the very long run you will be able to generate an annualized 18% (this is what Buffet did in the last 32 years). You would have nearly over performed the S&P500 by a factor of 2! The index returned 9.8% in the same timeframe. 18% might not seem that much but investing $10,000 for 32 years the Buffett's way, you now would have nearly 2 million USD.
Many of us (myself included) do not know, have no interest or have no time to go through financial statements of companies to choose which ones have high growth potential. Despite some of us are able to figure out patterns from something that in appearance looks like a chaotic system. In my opinion the most successful person at mastering this skill is the American mathematician Jim Simons. In one of his rare interviews, he claimed that he has no interest in reading financial company statements but he saw patterns in the prices of commodities. This gave him the idea to start trading and profit from the knowledge of these patterns. The result? 40% annualized return (net of fees, 66% gross) with only one single negative year. In perspective, investing the same $10,000 with Renaissance, after 32 years, the money would be worth north of 474 million USD.
Comparing investing and trading:
This brings me to my last point. Truly understanding the mechanism of how stuff works can create a major competitive advantage. A mathematician (very intelligent) managed to solve the market using mathematics rather than financial statements.
If he did it, we can do it too. Key being: patience, time, knowledge and smart work.