When one considers that in the US it is estimated that approximately 50% of all American households own stocks in one form or another accompanied by the fact that the total market cap of all publicly traded companies in the world reached a peak of about $57.5 trillion US dollars (USD) in May of 2008 (can be confirmed here), it should really be of no surprise as to the size of the investment industry and how attractive an opportunity to make money it becomes for many people. A lot see the markets as a way to fulfill their financial dreams, or at least provide them with a way to retire and live a comfortable life. In order to reach these goals many trust their life savings over to traditional brokers, money managers, or investment advisers. Most of these "professionals" have a similar traditional mentality on how to invest the money they are given, and even after a shock like the one which occurred in 2008, it is unlikely that the majority will change from these traditional ways.
The traditional dogma on how one should invest, which a majority of investors (professional or otherwise) follow, is the often repeated; buy and hold, invest in blue chip companies, hold for the long-term, and diversify, diversify, diversify! This method it is assumed, is the only consistent and reliable way to make strong profits. In reality though, investing in this manner is not nearly as attractive as many believe and has really only acted as a good hedge against inflation, which as not to be too pessimistic, is respectable. That being said, most people who invest want to try and maximize their profits, and a hedge against inflation is not what they normally have in mind. If someone wants to hedge inflation they are more likely to think about buying bonds, such as Treasury Inflation-Protected Securities (TIPS), the purpose of investing in stocks is to grow your wealth.
To show how traditional investing methods have historically only slightly made up for the destruction of ones wealth due to inflation, one can examine the compounded rates of return for the S&P 500 index versus the increase in consumer prices. It should be noted that I am not talking about the commonly reported core Consumer Price Index, but Consumer Price Index for all Urban Consumers (CPI-U) which includes things such as energy, food, and shelter prices, which core CPI leaves out. CPI-U increased from a base level of 100 in 1967 to a value of 629.75 in December 2008 (find official numbers here), this increase produced a compounded annual growth rate (CAGR) of 4.59%. While the S&P 500 index over the same time had a CAGR of about 6%, increasing from a value of 80.33 at the beginning of 1967 to a close of 903.25 in December of 2008. Basically this mean that if you had invested money in 1967, your real wealth would have increased by around 1.4% annually, and this is assuming that you invested it with a money manager that maintained returns (after all fees) in line with the broad indexes, a performance level which has almost become the accepted norm. This 1.4% annual return is certainly not as attractive as the misleading 5-6% annual returns that the proponents of traditional investing often mention.
Another common defense as to the validity and benefits of traditional investing and one which is often brought up by the media talking heads, is that people such as Warren Buffett, one of greatest investors of all time follows this type of method. However, this could not be further from the truth as Buffett earned his billions investing in a far different manner. Firstly, Buffett did not just earn returns matching the indexes, his returns beat the indexes and often at an astounding rate. For example during the first 12 years that Buffett ran his investing partnership he averaged more than 31% a year, while the Dow Jones Industrial Average averaged only 9%. To obtain these returns Buffett examined companies in excruciating detail, attempting to learn as much or more about the company than the founders themselves may have known. Learning not just the most minute accounting and financial details of each, he also learned their business plans, along with everything he could about the industries and sectors they were in. And only after learning as much as possible would he decide whether or not the company met his his stringent requirements to make an investment. All of this comprised Buffett's trading edge, allowing him to earn incredible returns.
Another interesting fact about how Buffett invested to make his initial fortune, which sharply contrasts the traditional view, is that he would only hold a few large investments in a small group of companies at any one time, thus being diversified to an extremely low degree. On the other hand as was mentioned earlier the common investing theme today is to diversify heavily, and invest in a broad range of strong companies. And by strong companies this usually means that advisers will pick the largest cap companies (blue chips), without doing anywhere near (and I mean not even close) the detailed analysis Buffett would do. (If you want to learn more about Buffett and his investing career, reading the book The Snowball is recommended.)
Now I am not suggesting that everyone should abandon their money managers, because it is quite obvious that one can do much worse then a 1.4% real return if they are not careful. However, those who are serious about trading and are striving to earn more consistent higher returns then they will have to look past the traditional method to more innovative techniques and strategies. These can include things such as stringent fundamental analysis like Buffet, technical analysis, statistical analysis, Elliott Wave Patterns, options strategies, neural networks, strategies based on earnings announcements, trading techniques based on price gaps, or even studying yield curves, to name only a few, or even completely new ideas that one may come up with during their study of the financial markets.
To conclude, it is interesting to note that at the end of 2008 the market capitalization in North and South America combined declined to around $14 trillion USD, which was a 43% decline from 2007, while the total share trading value in the same region reached $73 trillion, a 21% increase from 2007. (These stats can be confirmed here.) The total share trading value is defined as "the total number of shares traded multiplied by their respective matching prices". Now given that trading the markets is a zero-sum game (the total gains experienced by the winners is exactly equal to the total losses of the losers) even though the markets experienced huge declines in 2008, the actual opportunities for unbiased and astute traders actually increased quite substantially.
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