How can you tell a good company to invest in from a bad one? With hindsight it’s easy, but in the moment, it can be very difficult. That’s why most investors are better off investing broadly in the market, according to an abundance of evidence.
In a study published in 2010, Eugene Fama and Kenneth French found that actively-managed funds, where the managers select the individual companies that they like while excluding others, generally offered no measurable advantage after accounting for their costs.
Another study, published in 2018 by Hendrik Bessembinder, concluded that 4% of public companies were responsible for the entire net gain of the U.S. markets since 1926. The other 96% collectively matched the returns of U.S. Treasury Bills. If you were picking stocks and you missed out on that magical 4% of winners, your returns could have been dramatically lower than the U.S. markets.
If you’re still thinking that you can beat the market over the long run by picking individual stocks for your portfolio, consider the Efficient Market Hypothesis (EMH). The EMH argues that a stock price reflects the publicly-available information about the company. If you have non-public information and trade on it, you may be criminally liable for insider trading. If you have public information, the stock price probably already reflects that. Thousands of investment professionals are working daily to research companies and assess the available information. Do you think that you (or your stock-picking advisor) have different or better information than all of those professionals?
Most people who invest in individual stocks try to guess where things are headed in the future. But assumptions can change rapidly. For example, 18 months ago, did you think the price of oil was headed up or down? Did you think AI stocks were going to skyrocket, or implode? Did you expect Tesla stock to drop 20% or Micron to go up over 900% since the beginning of 2025? If you picked individual stocks 18 months ago, you may have hit a home run or lost money. If you bought the entire market, your portfolio has participated in the markets’ growth while being more diversified and less exposed to company-specific risk.
Every investor knows someone who made a lot of money on a particular stock. It’s an amazing feeling when it happens to you! But the evidence shows that those wins are more attributable to luck than investors realize. In general, I believe that a well-diversified, global portfolio will provide a better investment experience than a portfolio built around individual stock picks. Even if you don’t know what company will be the next big winner, if you own the market, you will participate when the winner emerges.
How ever you invest your portfolio, invest smartly and invest well!
Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.
