Are you a stock picker or an indexer?
Through the years, experience has taught me it’s very difficult to consistently beat the return of the stock market over time. By market, I’m referring to the S&P 500 index. In fact, from 2003 to 2016, only 1 out of 20 actively managed mutual funds beat the index. It’s easy to see those odds are not in our favor. After all, if professional money managers, with access to an abundance of information, resources, and CEOs can’t beat the market, what’s the likelihood we can? For the 1 out of 20 who do beat the market, what are they doing that the other 19 aren’t?
If you take time to study the investing principles of Warren Buffett, Peter Lynch, or Charlie Munger, you’ll discover a similar investment philosophy – focus on buying a company, not a stock. It’s a great company that can bring considerable wealth to shareholders who are patient and hold for the long haul. It’s a great company that can return 10x your money when the market returns only 2x during the same period.
Historically, the S&P 500 doubles in value approximately every 7 years. So, the question you need to ask yourself before purchasing a stock is – do I believe this company will double in value in less than 7 years? If you’re unsure, haven’t done the research, or lack conviction in the company, why take the chance it won’t? Why not just buy the index?
If you lack the desire to research a company, track its performance, and follow it closely over time, if you’re unwilling to build that conviction, buy the index – get your 10%. It’s the safest and easiest way to ensure you get your share of the market’s returns.Â
