You are the know-nothing investor

Diversification is for the know-nothing investor – Charlie Munger.

That is why, with some deep research and a bit of common sense, you can select stocks that have strong growth, good fundamental prospects, and will outperform the market.

That previous statement? Completely false.

You are the know-nothing investor.

Even professionals can’t outperform the market

Active fund managers have a job – to outperform their target benchmark.

Their whole job involves picking stocks that will beat the market return.

How well can they do this?

Not very well.

90% of mutual fund managers underperform their target benchmark at a 15-year horizon.

And remember, this is their full time job. They’re highly educated, extremely smart, and have teams of researchers backing them up.

If they can’t do it, why can you?

The market is smarter than everyone

Mr Market, as Benjamin Graham said, is frequently efficient, but not always.

Market efficiency means that prices reflect all available information. This means there isn’t a systematic way to exploit inefficiencies to make risk-free profits. There is no room for arbitrage.

At least, not by you. 

The market is the aggregate of all the traders who are acting on it.

Every single bank with their institutional might.

Every hedge fund with their PhD quants.

Every sovereign pension fund with their country’s resources.

It is like competing in the Olympics against a former gold medallist.

But this time every competitor is a former gold medallist.

You might be pretty good at stock picking.

But pretty good isn’t enough.

When you’re dining with lions, make sure you’re at the table, not on the menu.

Charlie Munger’s advice is for us

Diversification is for the know-nothing investor – Charlie Munger.

We are the know-nothing investor. And that is our strength. 

When we accept that, we can begin to invest wisely.

We can invest with our eye on our time horizons.

We can invest without getting swayed by short-term trends and fads.

We can invest without being influenced by stories of others striking it rich with their stock picks.

And we can focus on the things that make life worth living.

For we, dear reader, are the know-nothing investors.

P.S. For those who wish to know something that isn’t stock picking, check out my guide on investing to learn about sound investing principles.