Are you as exceptional as you think?
If you’ve followed along thus far, Zweig’s response raises the question: Do you fall under the exception or the general rule? Or, more specifically, do you have an edge at stock-picking?
For reasons that are beyond me, nearly all people (myself included) have a remarkable tendency to believe that they are exceptional at everything they do. “You’ve probably heard of the Lake Woebegon effect with drivers [in which] the vast majority of drivers have above-average driving skills,” Morgan addressed in a separate column about investor overconfidence. “This even holds true for drivers surveyed in the hospital after being injured in car accidents that they caused.” And, just to be clear, the same type of delusion spills over into investing.
While it’s true that there are certain inherent advantages that individual investors have over their institutional counterparts, such as time and the freedom to think beyond the next quarter, we also have an unfortunate tendency to get in our own way. “The investor’s chief problem — and even his worst enemy — is likely to be himself,” says James Montier in The Little Book of Behavioral Investing. We tell ourselves that we’re contrarians — that we’ll be “fearful when others are greedy and greedy when others are fearful” — only to then buy in the euphoria of a bull market and sell in the druthers of a bear market.
The point is that, as much as it pains me to tell you this, as it did to acknowledge myself, we are not exceptions to this rule. Indeed, if you were to go through your brokerage statement, as I’ve done, my guess is that you haven’t beaten the broader market over the course of your investing career. And if you have, it’s more than likely a result of luck. This is harsh medicine, I know. But it’s medicine nonetheless.
So, where does this leave you?
I want to be very clear about this point, because I suspect it has yet to sink in. If you’re reading this article, as opposed to vacationing on your 24-meter yacht somewhere in the British Virgin Islands, then it’s highly likely that you’re among the vast majority of us mere mortals who don’t have the time or the “differentially superior information or insight” that’s needed to outperform the market in the absence of random chance.
That’s the bad news.
The good news is that you don’t need this type of insight. You can buy it. Over the past five years, the recommendations of our top investing newsletter, Stock Advisor, produced an average annual return of 15%, or nearly double that of the broader market’s 7.2% (as measured by the Willshire 5000 index with dividends reinvested). And since 2002, it’s outperformed the S&P 500 by 83.6%. Thus, to revisit the question that prompted me to write this article: Can you, as an individual investor beat the market absent luck? The answer is “yes.” And you don’t even have to do the work.
The article The Theory and Practice of Beating the Market originally appeared on Fool.com and is written by John Maxfield.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Berkshire Hathaway.
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