The Chart That Proves Warren Buffett’s Point About Retail Investing

The Chart That Proves Warren Buffett’s Point About Retail Investing
Theodora Lee Joseph, CFA

about 1 year ago1 min

Mentioned in story

Stock-picking isn’t easy. Data over the past 20 years proves it. Just look at the chart: only 22% of stocks in the S&P 500 outperformed the index from 2000 to 2020. And an almost equal percentage of stocks actually made negative returns over the same period. The median stock performance was 63%, which seems like a delightful return – but that’s still only a fifth of what you would have seen investing in the S&P 500.

Sure, theory might state that markets are transparent and information is readily accessible to all investors. The truth is, it doesn’t always play out that way. The markets aren’t necessarily a level playing field. Think about this: investment research analysts get paid to spend 12 hours a day, six days a week studying only a handful of stocks. They get access to the senior management of those companies, go on site visits, and have conversations with industry experts – all of which helps them (i.e. the “smart money”) piece together a more cogent, mosaic understanding of a stock.

Now, that doesn’t mean that retail investors like you or me can’t beat the markets through good, solid stock-picking. What it means is that it’s really hard work, and your average stock-pickers (yes, even the professionals) are unlikely to consistently beat the market. So here’s your takeaway: make sure you have adequate exposure to a cheap market index fund before you even think about stock-picking. By doing so, you’ll find yourself in the camp of Warren Buffett, who famously said: “by periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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