There are only three ways to invest
Before you buy another stock, know which game you're playing.
1. Buy the index. You don't play the game: the market decides, you dollar-cost average and don't check it every day. 2. Do it yourself. You play: study the businesses, know the competition, have a view of the future. A lot of work. 3. Hire a manager. Someone plays for you: a mutual fund, a private deal, a VC fund. Each has its own risks and fees.
"Both large and small investors should stick with low-cost index funds." Warren Buffett, 2016 letter.
Transcript
There are only three ways to invest your money. And before you buy another stock, you should know which game you're playing. Number one, you buy the index.
You do not play the game of figuring out what is going to do well in the future. You let the market decide that for you and you just buy the index dollar-cost average. And you forget, you do not check your accounts every day.
Even Buffett says people should just stick to this. And over a long period of time, let's say 10 to 20 years, you will get pretty decent returns. With no time investment.
Number two is the do-it-yourself, self-management, where you go out there, you learn about the businesses that you want to invest in. You go in there, you try to do better than the market. And that requires a lot of work.
You have to study the businesses. You have to figure out the competition. You have to have a strong opinion about where the business is going in the future.
But that is the discipline that Buffett subscribes to. And number three is you outsource, you hire somebody, an agent, an active manager. You buy a mutual fund that has an expense ratio.
Where somebody else is managing stocks for you, or you'll find a private deal that someone else is managing for you. And it has its own risks. So those are the three ways.
Sources
- Buffett, 2016 Berkshire Hathaway letter, "Both large and small investors should stick with low-cost index funds.": https://www.berkshirehathaway.com/letters/2016ltr.pdf
- Buffett, 1996 Berkshire Hathaway letter (index funds; "Intelligent investing is not complex..."; circle of competence): https://www.berkshirehathaway.com/letters/1996.html