Even if you are the next Warren Buffett unless you have about half a million dollars you are still better off investing in index funds. How could it be that the worlds greatest investor should still buy index funds? Picking an index takes almost no effort and thus virtually no time, while finding superior stocks is a LOT of work!
Just Supporting Yourself is Costly
Let’s pretend that you are just as good as Warren at picking stocks. But don’t fool yourself it will be a full time job for you- he didn’t become a billionaire by lounging around! Since finding superior stocks will take all your time it must provide all of your income. According to Berkshire Hathaway’s 2008 annual letter to the stock holders, their average compound annual gains are 20.3% which beat the S&P500 index by an impressive 11.4%. If you can’t pay your salary from that 11.4% premium you would be better off with some other job and investing in a S&P500 index fund. How much money do you need to invest to make it worthwhile? Let’s just assume you are so good that you can do everything all on your own- no research staff, no special software, no special databases, just your time. If your salary is $57,000/year, then you need $500,000 to invest to pay yourself and still match the returns of the S&P500! Of course if you are that good at picking stocks you then go work for a mutual fund company earn a lot more than $57,000/year and invest in your own fund!
What About Dumb Luck?
I’m sure that someone reading this post will say- I didn’t need any work I picked stock XYZ and make an outrageous amount… That’s called luck, I’m happy for you but do you really think you are going to be lucky each and every year for thirty years? If you really are that lucky forget the stock market- go to Vegas and win your fortune in a weekend it will be a lot more fun!
In reality we are almost certainly far less skilled than Warren Buffett, we don’t have millions to invest, we aren’t incredibly lucky, and we have far less resources than a mutual fund manager and the majority of actively managed mutual funds fail to beat the market. Doe you still think it makes sense to try picking individual stocks?