Welcome back everyone. This is a video that I've had
planned for a while. It's a subject on my mind that
I've wanted to talk about and I'm finally here addressing it.
And that is the idea that you can't beat the market.
I'm sure you've been told that a time or two since you started
investing. Every investor's told that by
many people. There's a lot of people out
there, media outlets, money managers, different people that
are Bogle heads, a whole segment of the market that has convinced
themselves and they're trying to convince others that it is
virtually impossible to beat the market.
And by the market they mean the S&P 500.
Their claim is that as an individual investor, if you're
picking out individual companies creating your own portfolio, you
really can't outperform the S&P 500.
If you do outperform it for a month or a year or two years,
well, you basically got lucky. Or you took on a lot more risk
and you just simply got lucky. And the people that have beat
the market, the outliers, the pros, people like, well, Warren
Buffett, they were just super lucky.
They're one in a million, they're one-of-a-kind.
And you're not Warren Buffett. So don't even try to be Warren
Buffett. Don't try to pick individual
stocks. Their advice is to always buy
low cost index funds. That's the responsible thing to
do. Since you don't know what stock
is going up or down, you better just diversify and buy a little
bit of everything. Buy a little bit of hundreds and
hundreds of different companies, and over time that will do
better being average than investing in individual
companies. Because at the end of the day,
if you buy individual companies, you're basically gambling.
You don't have the skills, you don't have the ability to tell
what direction a stock is going. That's the argument they make.
Now don't get me wrong, I like ETS and I think they're a great
solution for the majority of people, especially those that
aren't interested in investing or doing individual analysis.
But what I reject is their notion, their idea that
investing in individual companies is akin to gambling,
that nobody can realistically outperform the market, and the
idea that if you do so, you're simply just lucky.
That paints a very grim picture for individual investors.
And I think it's wrong. I think it's an inaccurate
picture. What I'm going to present in
this video is a different side of things, one that shows a lot
more opportunity, a lot more capability for individual
investors to outperform. So what I'm going to do is
address some of the biggest arguments they have that try to
discourage people from picking individual stocks.
One of the biggest arguments that they use to discourage
individual investing is the idea or concept that only a couple
companies are responsible for the majority of returns in the
stock market. And unless you pick those few
companies by either skill or luck, you're going to be left
behind. I'm sure you've heard this
before, the idea that only a few companies are responsible for
nearly all of the returns. This is something that's not
new. It's been told over and over
again. Let's go ahead and even look at
an article here. The seven companies driving the
US stock market rally. Now pay attention to that.
There's only seven companies that are driving this market
rally. Now.
If we look at the article, we have the seven companies right
here. It is of course, the Magnificent
7. They make up a good chunk of the
stock market, but they're driving the overall returns of
the S&P 500. And this is what we're told as
individual investors time and time again, only a tiny few
companies are responsible for all the returns.
So what are the odds we have of picking out those few companies?
It seems impossible. Seems like a daunting task.
Do we really have the skills to select only a handful of
companies that are going to outperform?
The odds are that we're going to select some of the other 493
companies we're going to underperform.
Looking at this is extremely discouraging.
As an investor, you can come away with the belief that these
493 companies are basically duds.
They're underperforming and you have to have selected only a few
companies. And they even go further with
this. They give analogies like
investing in individual companies is like trying to find
a needle in a haystack. So you have a giant stack of hay
and you're trying to find a tiny needle, the one company that
will outperform the market, a virtually impossible task.
But buying the index is like buying the entire haystack.
That way you are guaranteed to have the needle in it.
That's the analogy they give. Well, what if I had to say that
this entire concept and this analogy of finding a needle in
the haystack is entirely false? You've been fed a falsehood by
the media, by different companies, by money managers.
When you're investing in individual companies, you're not
trying to find some special needle in a haystack.
Let's go ahead and take a look at the actual data here.
First of all, we can start with just this year.
We'll look at the S&P 500's performance this year.
You'll notice that year to date it's up 19.45%.
So that is the market's performance.
This is the haystack's performance.
Let's go ahead and take a look at the needles in this haystack.
Right here we have the S&P 500 component returns year to date.
So this is a breakdown of every individual stock within the
index and their individual returns year to date.
Let's go ahead and take a look here.
We have NVIDIA Corp with a 230% performance.
Did that beat 19%? Yes, it did.
So we have one that beat the S&P 500.
This is 1 needle in the haystack.
Then we have meta platforms with 178%.
That's another needle. We have Accenture 149%.
This one is another needle. So, so far, we have 3 needles
that have not just beat the index, they've gone up, you
know, double, triple, quadruple, quintuple over the index.
These are massive outperformers. They've gone up in orders of
magnitude over the index. We have Royal Caribbean, the
cruise line. That one's another needle.
We have Polt Group, 93% return so far this year, yet another
needle. We have 92% returns with Palo
Alto Network. Tesla, that's yet another needle
that's outperformed the haystack this year, 91%.
So, so far we have 7-7 different needles that have outperformed
the overall haystack, but we have 500 companies total.
So this is still a very small percentage, but we keep going.
We have AMD which is outperformed 89% this year,
Adobe up 84%, Carnival Cruise Line up 81%, Vera Isaac up 80%,
Arista Networks up 80%, Amazon up 75%, ServiceNow up 72 on and
on and on. We're at Company #15 now at #15
we have Lamb Research Corp, which is up 71% year to date.
This is company #1515 needles that have outperformed that
haystack, 15 companies out of the S&P 500 that have crushed
the overall S&P 500 returns. Now again, we go back to the
article here, the seven companies that are driving the
US stock market rally. So they say there's seven
companies driving the overall rally, giving you the impression
that unless you buy those companies, you've
underperformed. So that's clearly not the case
right here. We have the actual percentages,
the actual data. The market's up 19%, Company #15
is up 71%, but we can keep going.
We have Synopsis, Broadcom, Salesforce, Cadence, Copart,
Intel, Netflix, Eli Lilly, Chipotle, Microsoft Alphabet,
Booking, holding all above 50% returns this year.
All 27 of these companies have doubled the market returns.
And I don't want to sound like a broken record, but this
continues on. We go down the list, company 30
up to 35, up to 40. We're still at 47% returns with
up to 40 companies. Now all of a sudden it's not
seven companies that have outperformed the market, it's 40
companies that have outperformed the market to a huge extent.
They've over doubled the returns of the S&P 500.
We continue on FedEx, Apple, NRG, we have Intuit, Blackstone,
General Electric, Oracle, Pentair, 40% returns and above
for all of these companies. This year we're up to Company
#50. We continue down the list.
We get to Company 60, We're still above the S&P 500 returns.
We get the Company 70 still above the S&P 500 returns, up to
80, still above 9100 companies, and we're still above the S&P
500 returns year to date, which is 19.45%.
Investors could have picked any of these companies, all 100 of
them, this year, and they would have dramatically outperformed
the S&P 500. We go down to 110.
We still outperformed. We have companies like S&P
Global Live Nation, Motorola Republic Service, lots more
stocks that have outperformed the market.
We get up to company 120 and we're still above the S&P 500.
Now remember, the S&P 500 returns year to date is 19.45%,
meaning that right now, as of today, there are exactly 129
individual stocks in the S&P 500 that have outperformed it year
to date. 129. All right, so we have 129
companies that have outperformed the index.
That means that roughly 25% of the stocks in the S&P 500 have
outperformed the S&P 501 and four.
Now that seems a lot less intimidating, doesn't it?
I mean, come on, I don't have the confidence to select a
needle in a haystack. Trying to find a needle in a
haystack seems incredibly intimidating and near
impossible. And if that was the case, they
would be right. It would be virtually
impossible. But that's not the case. 25% of
the companies in the S&P 500 have outperformed the index this
year year to date. So selecting the stock is not
akin to finding a needle in a haystack.
It's akin to finding a needle amongst three other strands of
hay. That is what the stats show this
year. Now, we've looked at this year
alone, and you might make the argument that this year is
special or unique, and typically it's more difficult for
individual stock pickers. You'd be wrong again.
In fact, 2023 was an unusually difficult year for stock
pickers, far more difficult than most years in the market for
individual stock pickers. Let's take a look at the data.
Here's a table by year that shows the percentage of stocks
outperforming the S&P 500 index. So the percentage of stocks in
the index that have outperformed the overall index.
In 2023 it was only one, 4th, 25%.
In 20/22 it was 57%. The majority of stocks in the
index outperformed the index because the biggest weighted
ones, companies like Tesla, Big Tech actually underperformed.
So investing in basically any other company, in fact, over
half of the stocks in the index, you outperform the index.
In 20/21, it was 48%. In 2020 it was 30%.
In 20/19 it was 46%. Most of the time, it's roughly
40 to 50% of stocks in the index actually beat the overall
performance of the index. And this is the same going back
throughout history in 2000. And 1651% of the companies in
the S&P 500 outperformed the benchmark. 2015 forty 7% did
2014, 52% did so on and so forth.
Well, isn't this data a bit different than the picture they
try to paint? They try to tell you that
there's only a tiny select few of companies that outperform.
But we're looking at the numbers and typically on a typical year,
40 to 50% of companies outperform.
The overall index 40 to 50% is not a tiny sliver.
That's a big chunk of companies. That's hundreds of companies in
the S&P 500 every single year. So as an individual investor, as
an analyst, your job isn't to find the one or two companies
that will outperform, it's to find any company in that group
of 40 to 50% that will outperform the other 50 to 60%.
It's still a task. You still have to do work.
You can't just guess at it, but it's far more achievable than
the picture they try to paint. There's a big group of companies
outperforming the market. Now there's other arguments they
make like we look at this right here where the S&P 500 market
cap index has outperformed the equal weighted index.
The equal weighted is as if you put every single company at a 1%
weighting or a 2% weighting. Everything is equal weighted.
You don't weight Apple any bigger than you do any other
company like Vici. They have the exact same weight
despite their market cap. In 2023, the market cap weighted
is outperforming the equal weighted because of the Mag 7.
Those companies have done particularly well.
They're up 50, sixty 70% and they have such huge weighting
that they're dragging up the market.
The equal weighting on the other hand has been basically flat all
year and this again leaves you with the impression that you had
to select this small group of companies, otherwise you
underperform the index. Let's go ahead and take a look
at this data a little bit further back.
I looked at the historical returns of the equal weighted
index and I benchmarked that against the S&P 500 market cap
index. What we see is that the equal
weighted index has nearly identical returns as the market
cap weighted over a 15 year period in fact going way back to
2004. So we have over a decade of
historical performance and you can see how closely these trade
together. They are virtually the same.
They've diverged a little bit in some territory, but they've
matched up almost perfectly to current day.
Now this data is meaningful. It shows clearly that having an
equal weighted index where you treat every company the exact
same has performed roughly identical to the market cap
index where you're treating some companies with a lot bigger
weighting in the index. This means that overall, there's
a lot of companies that do well in the market.
Many of them succeed. It's not just a handful of a
small select companies that do well over time.
There's literally hundreds of companies that are making gains,
outperforming doing well. And the job of the individual
investor is not nearly as daunting or scary as some people
make it out to be. There are literally hundreds of
companies in the index that do really well.
Now, I also want to be clear here as well that I'm not trying
to say that outperforming the market is easy and anyone can do
it with very little effort. That's not what I believe at
all. The point that I'm trying to
make is that it's not impossible.
It's not as difficult as some people make it out to be.
There's a lot of companies that outperform.
There's a lot of opportunities and there are a group of people,
a big group of them, that have outperformed the market on a
consistent basis because of skillful stock selection.
And why is portfolio management. It can be done, but it's
certainly not easy. In fact, it's true that the
majority of investors underperform the index.
We can look at the data right here.
According to JP Morgan, the average investor earns only 2.9%
a year, which is really pitiful performance.
This is the average investor. Now JP Morgan doesn't go into
what the average investor is, but I assume that's any
individual investor that has bought an individual stock any
in their portfolio. And this is what I want to
address, why so many individual investors underperform the
benchmark. There's a couple big reasons
why. The first reason is that the
average holding period of a stock from an individual
investor is at a nearly all time low.
We have all these new investing tools like Robin Hood, we have
Weibull. We have all of these different
places where you can invest for free and those free trades make
it so Investors trade very frequently, impatiently.
They buy into stocks and sell them within a year.
A10 month average holding period is incredibly short.
That is basically gambling. So the average investor is not
really an investor at all. They're gamblers.
They're not buying into businesses because of their
fundamentals or future growth prospects and cash flows.
They're buying into them because of speculation.
So this is a group of so-called investors that get grouped into
the statistics and lower the performance of the average
overall. But don't be mistaken, having an
average holding time of 10 months does not make you an
investor. You're not buying stocks because
of due diligence, analysis or look at the fundamentals.
You are speculating on price movements.
Doing so has been proven time and time again to be a losing
proposition. In my portfolios right now, my
average holding time is 29 months, so almost three times
the average investors today, and that's with a portfolio that's
five years old. As I continue to age My
Portfolio, my average holding time will continue to go up.
But obviously having three times the holding period gives me an
advantage over speculators. But that's a big reason why
individual investors underperform.
A huge group of them aren't really investors, they're
speculators. Another big thing that feeds
into underperformance are a lot of biases that we have.
For example, we have recency bias where we invest in the
latest and greatest thing and we forget about the fundamentals of
a company. It is normal human behavior to
try to bypass performance. We see stocks going up and we
want to buy the performance that they recently had.
But you can't do that in investing.
You have to buy stocks when they have good value and good future.
When a stock goes down in price, its future expected return goes
up. But it's normal human behavior
to buy companies that have recently risen from low prices.
This leads to under performance. So with the combination of very
short holding periods plus buying whatever recently went up
in stock price, it's no question of why individual investors have
such poor performance. They have a poor investing
mindset and strategy and overall that drags down their
performance. Another reason that I believe
contributes to underperformance is not truly knowing what they
own. Peter Lynch says to know what
you own. Meaning, know the products they
sell. Know their fundamentals, Know
what their growth looks like over a long period of time.
Know what their cash flows look like and their balance sheet.
Understanding this stuff is important.
Ioffer qualtrum.com, which is a service that I sell.
But even if you don't use Qualtrum, there's other options.
Use Yahoo Finance. Use Seeking Alpha.
Use something to know what you own.
And if you're not willing to do the fundamental analysis or look
at a stock, then don't buy it. Buy the index if you're not
willing to look at it. Because if you're not going to
look at what you own and the fundamentals of it, you're going
to underperform. I think as investors, if we have
more thoughtful analysis on the companies we own, we actually
understand the fundamentals of what we're buying as well as if
we avoid recency bias, we avoid buying whatever is hyped up and
whatever is going up in price. And if we have a longer holding
periods, then the dismal 10 months of the average investor,
all of that will increase our chances of outperforming.
It'll put us more into the category of outperformance than
underperformance. It increases our odds of buying
the companies in the 3040 and 50% that outperform the index
rather than the 50 or 60% that underperform.
Now if we don't want to do any of that, if we don't want to do
stock analysis or control our emotions when it comes to
investing, it's better to just buy the index.
That's an easier solution and it takes a bit less effort.
But if we are willing to do the work, I think there's a great
chance about performance. Now the last thing I'll mention
here is I just want to share this clip from Peter Lynch
because I think it's incredible and it's applicable to
individual investors. Peter Lynch has crushed the
market for 13 years that he ran Magellan and he did so by
fundamental due diligence, by buying companies that he thought
had really great future prospects and we're above
average. Here's his thoughts to
individual investors. You shouldn't be intimidated.
Everyone can do well in the stock market.
You have the skills, you have the intelligence.
It doesn't require any education.
All you have to have is patience.
Do a little research. You've got it.
Don't worry about it. Don't panic.
Peter Lynch is one of the best investors to ever live that
managed a fund. Yet he shares the liberating
message that individual investors can do well.
They can outperform the market. He believes that individual
investors have unique advantages over Wall Street.
Because of our knowledge, because of our daily
experiences, we have edges that we can exploit to outperform.
So that's basically it. That's all I wanted to share
with this video. There's a lot of people right
now that are highly discouraging to individual investors.
There's a lot of money managers that have a strong incentive to
make you feel confused or concerned or overwhelmed with
individual investing. The truth is that buying a stock
is not buying a lottery ticket. You're not gambling, you're
buying a piece of a business. And there's many businesses out
there that will do really well, not just a select few.
That's all for now. See you in the next one.