A prevailing theory for stock market success is low-cost, passive index investing is the best bet over a time horizon of a lifetime. A metaphor used to envision this theory is one of a racetrack.
A Day at the Races
Allow me to draw the comparison of markets to a horse track. The physical tracks which the Belmont Stakes, Preakness, or Kentucky Derby are held.
For the layman, betting on horses its more or less a crap shoot. One could study genetics, past performances, jockey reputation, or even simply judge how virulent the horse looked as it entered the stadium. But we are also blissfully ignorant of many factors influencing outcomes. A jockey may be using the race as a training run, adapting a new race style or a horse may be slightly injured etc. The point is the managers/stake-holders on the other side of the table have more information available.
As we make a selection I accept that a myriad of factors out of our control are in play. At its core, even the best bettors are making a substantiated guess. On any given day, a select few might make a fortune, many will break even and the largest group, those that lost money. Although one thing we can be sure of, the racetrack is going to consistently profit from the day’s event.
Now imagine stocks as individual horses. Apple is the thoroughbred in lane one, Google looking strong in lane 2, Coca Cola struggling in lane 3, AT&T’s jockey paying generous dividends in lane 4, Federal Bonds is looking lethargic in lane 5 and so on.
Collecting evidence, we have some idea which horses will out perform others in the short-term. Once the race actually starts the hypothetical Google horse stumbles out of the gate, the AT&T horse gets boxed in on turn two and an unheralded long shot from the back of the pack ends of winning. Those fortunate few who bet on the long shot are going to hit it big, but the rest of us are going to be left scratching our heads. If I could, I would bet on the racetrack.
The longer the time horizon, the less certainty I will have for my predictions. In 10,15, 25+ years I do not know which individual stocks will be thriving or floundering. But I do know the racetrack or total market will still be consistently churning a profit. Yes, it will have some off years but risk is apart of the game. If returns were guaranteed, stock markets couldn’t exist. By betting the racetrack (total market tracking funds)rather than individual horses (stocks) I am mitigating risk and placing an investment for sound, consistent growth over the course of decades.
I can’t tell you, nor can anyone else, which stock will be prospering in 40 years. But I do feel comfortable telling you the total market will be stronger than it is today.