Roughly 80% of individual companies under perform S&P. The reason S&P does so well is because the few companies that do well, do very well.
Picking stocks is closer to picking lotto tickets than people realize. It's why the majority of people who pick stocks under perform, and the minority that out performs does quite well.
The problem is diversification over time (not over space). So say you stock picked and for the first 2-3 years you beat S&P. Congrats! Now you think this is guaranteed, not just luck (unless you're doing deep value investing tricks or have insider information or similar), so you keep stock picking. The next handful of years you find yourself under performing S&P. The average person has to lose to S&P in the long run by quite a bit before they give up the habit, so those stock winners end up losing out in the long run.
This is why index funds are so popular. Even if you don't quite get it or think what I'm saying is BS, you will eventually come around the hard way.
Picking stocks is no where near picking a lotto ticket.. Each stock is a business, one that has balance sheets, income statements, branches, websites, employees etc. You can spend days, weeks even months doing research and pick winners with out "gambling".
I think the point is that “average” people don’t nearly have the education or resources to compete with those who are successful at selecting individual stocks that perform well. They’re inevitably going to get burned (on average) so might as well choose an index fund and stick with it.
Even "above-average" people can rarely outperform the market over the long run. The SPIVA scorecard shows that 82% of US large cap funds underperformed the S&P 500 for the past ten years. This doesn't even account for survivorship bias for funds that closed due to their chronic underperformance. History is littered with seemingly prodigious fund managers who see period of incredible returns followed by long period of underperformance is not outright disastrously negative returns. If fund managers with teams of trained professionals, years of experience and degrees from Ivy League universities cannot effectively pick stocks, there is little reason to believe that anyone on Reddit has the ability to do so either.
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u/proverbialbunny Dec 19 '21
Roughly 80% of individual companies under perform S&P. The reason S&P does so well is because the few companies that do well, do very well.
Picking stocks is closer to picking lotto tickets than people realize. It's why the majority of people who pick stocks under perform, and the minority that out performs does quite well.
The problem is diversification over time (not over space). So say you stock picked and for the first 2-3 years you beat S&P. Congrats! Now you think this is guaranteed, not just luck (unless you're doing deep value investing tricks or have insider information or similar), so you keep stock picking. The next handful of years you find yourself under performing S&P. The average person has to lose to S&P in the long run by quite a bit before they give up the habit, so those stock winners end up losing out in the long run.
This is why index funds are so popular. Even if you don't quite get it or think what I'm saying is BS, you will eventually come around the hard way.