In the film Rounders, Matt Damon’s character, Mike McDermott, is quoted: “Listen, here’s the thing. If you can’t spot the sucker in the first half hour at the table, then you ARE the sucker.”
In poker terminology, a “sucker” is referred to as an unskilled player who thinks he is good enough to beat better players but will likely be the loser. Since poker is a competition between players, it is crucial to play against weaker players in order to win money. If you can’t spot the sucker at the poker table, than you are likely playing at a disadvantage and should leave the table.
This analogy can be used for amateur investors that buy their own stocks. I'm not talking about people that buy stocks for a living, I'm talking about regular people with regular day jobs that feel that they should include individual stocks in their portfolio.
The Friday Night Poker Game
Imagine that a friend of yours invites you to their Friday night poker game. The first thing you're going to ask is: "Who's going to be there?".
Your friend answers: "Well you don't know them personally but here are a few facts about the other players":
The other players are smarter than you
The other players have more experience than you
The other players get and process information faster than you
Oh yeah.........the other players have about 100,000 times more money than you
And you say............"Sure count me in! Let's put my retirement savings on the line!"
The truth is, when you buy individual stocks, you are really betting that you have the skill and ability to beat the other investors out there. (Since for every buy order, there is a sell order). If the market consisted of mostly regular people like ourselves, then maybe you might stand a chance....but the problem is, the stock market consists of mostly institutional and wealthy investors (almost 90% of trades).
Imagine that the stock market is the poker table. Seated to your right is Warren Buffett, to his right is Templeton Investments, beside him is the Canadian Pension Plan. The other four players are other hedge fund, sovereign funds, mutual funds, or pension funds.......Since every poker game has a winner and loser........... Who's the sucker at the table?
Yes you could get lucky. But investing is for the purposes of reaching your financial goals, not about trying to win the big one. Over a 30+ period, I'd argue that the strategy of buying individual stocks and playing the market against much larger, experienced, and sophisticated investors is not a recipe for success. If you are currently buying individual stocks in your portfolio, consider stepping away from the Poker table.
Instead of buying individual stocks, consider building a passive portfolio of index funds that track the entire stock market. Doing so by buying ETFs or through a robo-advisor are ways to be better diversified and not have to worry about trying to pick stocks against the pros. Buying Index Funds is choosing to walk away from the Poker table and instead capturing the average returns of all of the players (the pension funds, institutions, and hedge funds) in the form of market returns. That to me seems a prudent way to invest for your long term goals.