The Cost of Investment Hubris

Warren Buffett has famously said that "diversification is a protection against ignorance" and that it "makes very little sense for anyone that knows what they're doing."

This quote is often used as an argument against diversified investment strategies, but the thing is, Warren Buffett was probably not talking about you when he referred to people who know what they’re doing.

If you think that you are included in Buffett’s group of “people who know what they’re doing” you may have investment hubris, which can cost you in the long-run.

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[bhuman]

I like diversification because then I can focus on eating a warm chocolate brownie with vanilla ice cream on top, and NOT be staring at a screen evaluating individual stocks.

[j.frankparnell]

I witnessed this phenomenon a few years ago during the Canadian pot stock boom. I worked with a group of people that thought that that they "knew what they were doing" because they were regular pot users and could therefore predict which companies and products would be successful. They got lucky and made a bunch of money (on paper anyway). At that point they considered themselves financial geniuses and continued to invest everything into these same companies. Fast forward a few years and their investments became practically worthless and they were right back where they started - broke and ignorant.

[kage-fm]

*guy with hubris:* yeah, but i’m not one of the guys with hubris

[MatheusC]

I'm both a Buffett stan and a Ben Felix stan. I believe that people like Buffett are incredibly skillful and I admire buffett more than I can say. I also believe that you can be skillful and beat the market.

But I am also a Ben Felix stan. I believe that most people, including myself, are better off holding index funds. I work in the active management industry, and even though I try to work my ass to find investments that outperform, the reality is that I'm way more likely than not to underperform.

[MailmanCornetto]

I love how you keep hammering home the same message. It helps me put my ego aside and accept I'm not special when it comes to investments.

[moneycessity]

Beating the S&P500 in a year is one thing... but doing it consistently AND with a similar risk profile is really tough! Great video!

[ironcito]

Buffett also said that you should only buy shares of a given company at a given price if you can write an essay explaining why. That essay would include a valuation of the company, estimations of its future cash flow, its competitive advantages, an analysis of the industry, your trust in corporate leadership, competitors, and so on. It would practically be a full-time job, like it is for Buffett. Even then, you can (and most likely will) get it wrong. And all that wouldn't be worth it to _barely_ beat the market. Might as well use that time and effort to work on something else and make money to invest 😅

[ShOwStOpprr]

I had this hubris my first 10 years of investing, , and everything i did was an absolute clusterf*ck of lost money, , if only i had put all that time and money to work in a simple SP 500 index fund back then i would of had a better head start in building my retirement nest egg..i just didn't know it was that easy back then.

[kosi]

Ben, I started as a real estate investor who started buying after the GFC (when everything was cheap) and rode the rising tide of the 2010s. Why would anyone invest in index funds, I scoffed.

I first came across your videos in 2018 or so, with great skepticism (and hubris). You definitely weren't preaching to the choir to me. But I kept listening and now most of my money is invested in AVGV. Thank you for putting these videos out and being a reliable source of evidence-based investing knowledge.

[robertdelorme]

Love this Ben! I wish I had discovered Warren Buffett 30 years ago but was at least lucky enough to get his insights in 2015 for low cost index funds. Your vid gives me confidence that I am doing the right thing for the next 30 years. Thanks for this!!

[josephlombardo]

My interpretation of Warren's words is "if you want to pick stocks, spend the time to know what you're doing", otherwise simply invest in index funds and enjoy the rest of your life. People keep playing the lottery for fun, why not research companies/investments for fun? I think the odds are higher!

[manishdyall]

Ben Felix - something missing from every school's curriculum. If I ever get to run a country, I am including you in the national curriculum

[Esonar]

Gyahahaha, I love that opening "He probably wasn't talking about you". Harsh truthbombs in the first 30 seconds. Love this channel!

[davidschelkens]

Spot on. Everyone thinks they are special, most arent. As always, the hardest thing to do is keeping things simple. Keep up the good work Mr Felix!

[LumiLunar]

Warren also said during an annual meeting while answering a question if he was an average working man not doing any stock research then he’d invest in the S&P. He said that the S&P is the best investment for anyone who doesn’t contribute any time to researching businesses.

He’s not calling us idiots. He just thinks that if you’re a professional who knows what they’re doing then you’d be losing out on bigger opportunities by investing in an index. And keep in mind he said that he’s only found about 10 investors in his lifetime who he thought was capable of doing that.

[rhythmandacoustics]

The real question is how do you if you are good or appropriate for non index investing. I think the once you know basic finance instruments, basic financial accounting, and really know a particular industry, you are good. Peter Lynch did a good job in his 1997 lecture.

[robinwoodbury]

Ben, though I always liked your longer-form videos with all their academic rigor, I have to admit these recent shorter-form works are easier to digest and extract kernels of wisdom from. Thanks as always!

[Juhno]

I always roll my eyes when people try to argue a point with short quotes.

[dennismicallef]

My smartest moment was when I admitted to myself that I simply didn't know what I didn't know about picking stocks.

I have since switched to a Market cap index fund and added a 16% small cap value tilt.
I have learned an awful lot from the folks at PWL, all for free from helpful videos like this starting from the couch potato model.

Thanks!

p.s.
I believe that a lot of people misunderstand Buffet's quote because they equate ignorance with stupidity. They're not "stupid" so he obviously isn't talking about them... :) To me, it means that someone who isn't an expert, should in fact diversify.

[Lotar_Kowal]

I joined watchers of this channel recently, but even after some time... it's priceless...