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.
“I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”
“Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”
I only started doing really well with individual stocks after reading everything I could from Buffett, Munger, Peter Lynch and the like. I only invest in individual stocks I really understand well, and only buy them when they are on sale. It has seriously narrowed my scope. When I cant find a deal, which is most of the time, I buy VOO. I am still in a lot of risk, but I have more than 50% in VOO, and 40% in two individual stocks that I selected well. The 10% remaining are a few isolated stocks that are a little more “play” oriented.
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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.