The average everyday investor has and will continue to earn below market returns. It is ingrained in his mind just as it is ingrained in the mind of a dog to sit when he sees a treat. Human nature will easily defeat logic inside the battle of the average investors head. Throughout history, during boom and bust cycles, the average investor got whiped out during inflection points at bull and bear market cycles.
The past real estate bubble is a perfect example. I remember during the heat of the bubble a friend of mine wanted to buy a second house as an investment. I thought to myself, does he really expect to earn a return on this property when real estate prices had already ran so high and were in severe danger of collapse. Yet the feeling of being left out of probably the greatest real estate bull market in American history was too tough of an idea for my friend to comprehend. He just had to get in. Unfortunately, he did buy that house, and now that house has been foreclosed upon.
There are countless other examples such as the tech bubble bursting at the turn of the millenium and the most recent bear market that the average investor gets screwed. The stock market has rebounded substantially since the market lows of March 2009. Yet the average investor was on the sidelines during this rally. Now consequently, surveys are showing that the average investor is feeling more comfortable about investing in the stock market. However, the time to be fully invested in stocks was at Dow 6600 not Dow 11000.
For an average investor to make above average returns, he simply must be contrarian when it comes to market timing. Buffett sums it up best by saying, "be fearful when others are greedy and greedy when others are fearful."
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