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.