Warren Buffett’s famous quote about winning monkeys in the stock market
Famous investor Warren Buffett has a sense of humor and a sense of words. Berkshire Hathaway’s chairman and CEO is known for sharing complex investing topics simply and cleverly. He uses this skill in interviews and in his annual letter to Berkshire Hathaway shareholders.
Buffett’s 2020 shareholder letter includes a lesson for investors worth revisiting in 2022, given the current state of the stock market. Here is what he said:
Indeed, a patient and level-headed monkey, who builds a portfolio by throwing 50 darts at a board listing all the S&P500 will be — overtime — enjoy dividends and capital gains, as long as it is never is attempted to make changes to its original “selections”.
Read it quickly and you might think it’s a joke. But in true Buffett style, he delivered a four-part investment class in less than 50 words. Read on for my takeout breakdown.
1. Process trumps expertise
It is significant that Buffett chose a monkey as the star of his story. The investing monkey is not a skilled Wall Street pro armed with real-time data and algorithms. On the contrary, the monkey presumably has no financial expertise, given that it selects securities by throwing darts.
What the monkey has is a process. And by following this process to the letter, the monkey generates dividends and capital gains over time.
2. Choose quality
At first, the monkey chooses quality assets. Yes, there are darts involved, but the random selection is drawn from stocks in the S&P 500. They are the largest and most successful public companies in the country. Many of them have longevity, financial strength, loyal customers and experienced management – qualities associated with long-term share price appreciation.
Buffett’s monkey invests in 50 S&P 500 stocks. This means that each stock is only 2% of the overall portfolio to begin with. Diversification across so many positions protects the monkey if one of these ventures fails. Even if two or three stocks lost all their value, the monkey would see a decline of less than 10%.
4. Buy and keep, no matter what
Monkey returns grow over time, and only if the original shares are not traded. To translate this into investor language, the monkey practices buy and hold.
The buy and hold approach generates profits by taking advantage of the long-term natural growth of the stock market. This growth is on average about 7% per year after inflation.
It is important to note that the 7% average is more reliable over longer periods. Over the course of a year, the stock market could be down double digits. Over the next year, stock prices could rise in double digits. These highs and lows average 7%, but it can take 10 or 20 years for that to happen.
That’s why Buffett’s monkey must be “patient and level-headed.” Effective investors who buy and hold don’t panic and sell when the market becomes volatile. They know that the potential for growth increases the longer they hold their positions. Additionally, selling would take them out of the race for the clawback gains that follow downturns.
In short, it’s critical that buy-and-hold investors stay invested and stay the course. Avoiding market turbulence is how you use long-term average market growth to your advantage. It is also the easiest way to come out ahead on the other side of a correction.
Invest like a… monkey?
You don’t need deep expertise (or darts) to build wealth in the stock market. However, you need patience and a process. Fortunately, the buy-and-hold approach is a straightforward process. Invest in a diverse group of quality stocks consistently for decades, even in declining markets.
The buy-and-hold may not have made the monkeys rich, but it has made ordinary and extraordinary investors millions. He can do the same for you too.