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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