In The Investor’s Manifesto, William Bernstein particularly puts down the idea that individual investors can successfully manage individual stock portfolios. “Trading individual stocks is like playing tennis against an invisible opponent; what you don’t realize is that you are volleying with the Williams sisters.” He writes this to explain how there is a buyer and seller for every stock transaction. In many cases, the buyer or seller on the opposite end of your trade knows way more than you about that company and its future earnings prospects. That’s because the majority of participants in stock trades are sophisticated institutions, corporate insiders and other professional investors.
Bernstein further makes his point by reprinting a quote attributed to Charles Ellis in the June 2001 edition of Money magazine.
“Watch a pro football game and it’s obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, ‘I don’t want to play against those guys!’ Well, 90% of stock market volume is done by institutions, and half of that is done by the world’s 50 largest investment firms, deeply committed, vastly well prepared—the smartest sons of bitches in the world working their tails off all day long. You know what? I don’t want to play against those guys either.”
For much of the past, Bernstein regularly professed that an average person can be a successful do-it-yourself investor. He wasn’t referring to trading stocks, but instead, building diversified portfolios with index mutual funds. But having experienced challenging global stock markets consistently in the decade since he wrote his first book, he’s changed his mind.
“Successful investing requires a skill set that very few people possess,” he writes. “This is difficult for me to admit; after all, I have written two books premised on the idea that anyone, given the proper tools, can turn the trick. I was wrong. … I have come to the sad conclusion that only a tiny minority will ever succeed in managing their money even tolerably well.”