Warren Buffett’s stellar career has been the subject of rigorous analysis a number of times, usually confirming that chalking it up to luck is ridiculous, and a recent study from Salil Mehta shows that very few people can ever hope to beat the market long-term, let alone recreate what Buffett has accomplished. But with a good couple of years under their belt, investors may need to brace themselves for a new crop of overconfident financial analysts.
Millions of new investors off to a good start
“If you and your friends had all tried your hand at stock selection and market-timing along the way, then there is a good chance that you are feeling pretty good right now,” writes Mehta. “The probability of outperformance would suggest roughly a couple million Americans in their 20s have this sort of investing experience and can feel comfortable with their initial results, even though a small fraction of this group will actually continue to bear out skillful outperformance over the long-run.”
Mehta estimates that there are around 50,000 skilled investors with 30+ years’ experience who can beat the market without relying on luck, and compared to the 8 million Americans working in finance today that’s just over half a percent. While there should be skilled investors in their twenties, it’s almost impossible to separate skill from luck and determine who those people are until later in their career.
Buffett minimizes big swings; comes out ahead long-term
To make matters even more difficult, some of the best investors in their twenties today may not have had a great year in 2013. Buffett, who repeatedly warns people to be cautious when others are bullish, has underperformed for the last few years. That doesn’t mean he’s lost his edge (though some have suggested this to be the case). His long-term strategy earns less when the market soars and loses less when the market falls, and has come out ahead on an annualized basis for nearly fifty years.
Invest in the index, minimize fees: Mehta
“Knowing how to throw a javelin or play chess in junior high school doesn’t imply we should think we can then effectively compete in the Olympics nor play chess against a computer,” writes Mehta. “It’s great to try for several years, but one should also know that quitting if one doesn’t succeed and moving on to Plan B is sometimes more wise.”
His conclusion is that the vast majority of people should invest in a low-fee index fund. Ironically, because most people are so bad at picking stocks and timing markets, in the same sense that almost everyone is bad at chess compared to Kasparov, getting the market return usually means that you’ll be outperforming individual investors as a group.