What is the BEST Stock Market Investing Strategy?

Well guys, it's day four of the new money advent calendar and I'm already struggling. I'm recording this at 9:30 at night. I am in my pajamas; I'm like the classic news anchor right now. You know, got my good shirt on up top and then just wearing my pajamas.

But in this video, we're going to be talking about what the investing strategy that I genuinely do believe is the best strategy for most people—for basically everyone, actually—this applies to. I'm going to compare two strategies, which are the active investing strategy and the passive investing strategy. And spoiler alert: I think the best investing strategy for most people, for most everyday people, is by far the passive investing strategy.

So in this video, I'm going to talk about exactly why I believe that and show you a little bit of evidence which might open your eyes a little bit to the passive investing strategy. So anyway, with that said, leave a like in the video if you do enjoy it, subscribe to the channel to keep up to date, and make sure you hit the bell notifications as well. Okay? Because you want to stay updated. Of course, one of these videos is coming out every single day, so if you want to stay up to date with the 25 December videos that I'm going to do, then make sure you hit the bell notification. But for now, let's get started.

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So very quickly, I'm just going to touch on the difference between passive investing and active investing. I'm not going to spend too much time here because I talk about it pretty much all the time. But passive investing is quite simply being a market participant. So you're not trying to pick stocks here and there and outperform the general market. Your aim is to find market tracking investments and utilize them to literally get the same return as the overall market.

Okay, so you're not—yeah, definitely not picking individual stocks. A lot of passive investors follow what's called the dollar cost averaging strategy. All that means is that you buy your market tracking investment at, you know, time intervals—identical time intervals—and you do that like for the rest of your life. So whatever you commit to might be quarterly or six-monthly or annually.

The idea is you find that market tracking investment and then you buy, say, whatever it is—two thousand dollars or maybe five thousand dollars worth—every single quarter. And the idea is that over time, that just averages you out to the general market return. You get what the market gets, good or bad.

Active investing, on the other hand, is not participating in the market; it is trying to actively beat it, trying to select individual promising investments to outperform the market over time. Now interestingly, I am a big fan of active investing. I love researching companies and picking individual stocks to buy, but I definitely do believe the passive investing strategy is a much, much better investing strategy for most people.

Now here's the thing with active investing: buying individual stocks, you can make a lot more money than if you're simply a passive investor. Absolutely true. You can make millions and millions and millions being an active investor, whereas passive investing is much harder. And interestingly, all of the biggest, you know, most notable investors, past and present—you know, we're thinking about the Grahams, the Lynches, the Buffets—those guys that hit the ultra-rich club, they are all active investors.

And it's true, you're never going to be the best or the richest investor if you are simply a passive investor. However, the point here is that you also won't be the worst investor because the worst investors in the world are also active investors. And the other thing with active investing is that it takes time and it takes discipline, and they are two things that a lot of, you know, everyday people simply can't devote to their investing.

You know, a lot of us have jobs that we have to go to. I mean, if you look at the big money managers, the most successful investors, it's literally their job to sit and read about stocks all day. I mean, Warren Buffett says that he reads 500 pages of stock-related material a day. A day! How insane is that? It's a commitment that a lot of us who just, you know, show up and go to work each day, we can't possibly fit all of that in.

And I'm not saying that active investing is impossible for the average person because it's definitely not. Like, a lot of—like everyone could do active investing if they wanted to, but it does require a lot of time and a lot of discipline, which a lot of people just can't quite commit to because, you know, it takes researching hours, you know, reading annual reports on your weekends and that sort of thing. And a lot of people just don't want to do that.

Now on the flip side, passive investors do not have to do that. Their strategy is—well, they think about this—they already know what they're buying and when they're buying it for the rest of their life. They already know. They don't need to spend hours and hours researching every week, oh what should I do, should I do this, should I do that, what's the next stock? They already know it's in the strategy, and they don't need to keep up with what's going on in the financial markets.

In fact, passive investing is better. People do better with passive investing if they don't keep up with what's going on in the markets. In fact, ignorance is the passive investor's superpower. And the reason why passive investing works so well for the average person is because it eliminates the psychology of investing—and that is a big thing to focus on. And that's one of the reasons why so many active investors actually do really, really terribly and don't beat the market, and passive investors just make a lot of money because I'm not quite sure why this hap—well, first of all, it really pays off if you are going to be an active investor. You really need to understand your temperament, and you need to stay ultra-rational to make clear decisions and not to act on any short-term news or act on a whim.

That's like why Warren Buffett is essentially the world's best investor—because he does not get caught up in the short-term news and hype and fear that's coming out in the media. He doesn't. He blocks all that stuff out. That's why he's so good: it's because he is ultra-rational. But for some reason—and I don't know why this is—for the vast majority of everyday people, they fail. They can't block out the noise. They actually get sucked into it. They get sucked into the hype. They get sucked into the fear.

And as an everyday Joe active investor, all that leads to is—it just leads to acting on a whim, which very frequently leads to poor financial decisions, making poor short-term focused decisions instead of focusing on the long term. And those decisions definitely cost active investors a lot of money. And that's another reason why I think for most people the passive investing strategy is just so awesome: because you don't have to pay attention, and it is still a very solid investing strategy.

In fact, the less attention you pay, the better.

And following up from that, the next point I wanted to talk about is you think about this: passive investors set themselves up through dollar cost averaging to get exactly the same return as the market. And historically, the market has proven to go up, generally speaking, at about eight percent per year. But you know, the really crazy thing is that most active investors don't beat the market.

And I'm not talking about just maybe people like you and me, like the everyday Joes of the investing world; I'm talking about even the big money managers, the professionals, the people that sit in front of computer screens or read annual reports every single day. Most of these people—active investors trying to pick individual stocks to outperform the market—the evidence is clear, and I'll talk through it in a second. Most of the time, active investors just do not beat the market.

In fact, have a look at this from my good old mate Warren Buffett. He—in 2008, Warren Buffett issued a challenge to the hedge fund industry, which in his view charged exorbitant fees that the fund's performances couldn't justify. Protege Partners LLC accepted, and the two parties placed a million-dollar bet. Now the bet was essentially that Warren Buffett was betting that the hedge funds couldn't outperform the market and therefore their fees and their services really weren't justified at all.

And then obviously the hedge fund was betting the other way, and of course Warren Buffett won. It says Buffett has won the bet. Ted Cites wrote in a Bloomberg op-ed in May. The Protege co-founder, who left the fund in 2015, conceded defeat ahead of the contest scheduled wrap up on December the 31st, 2017, writing, for all intents and purposes, the game is over.

I lost. Buffett's ultimately successful contention was that including fees, costs, and expenses, a simple S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over 10 years. The bet pitted two basic investing philosophies against each other. Yeah, this is what we're talking about: passive and active investing.

So think about that. Warren Buffett, the world's best active investor, the world's best stock picker, bet that passive investing would beat most professional active investors—and he won. But even with that said, there's even more evidence that I want to show you about these active stock-picking professional funds.

Okay, have a look at this—these SPIVA charts, right? This is so, so interesting. What this is looking at is what percentage of active funds in the country underperformed the country's main stock market index. And we're going to look over the past five years. So start in the US: we'll look at how many—what percentage of active funds underperformed the S&P 500. Guess what? 78 percent of them did.

But you know, maybe that's an anomaly—it's not. But we'll keep looking anyway. So let's try Canada. Wow, there you go—97 percent of active Canadian funds failed to beat the S&P TSX composite. It goes on—Mexico: 80 percent of funds failed to beat the S&P BMV IRT. Brazil: 80. Chile: 93. Europe: 72.56 percent of funds didn't beat the Europe 350. Here in Australia, 80 percent of our active funds didn't beat the ASX 200.

The evidence is staggering. So yes, in the grand scheme of things, active investors—that if you want to make big, big, big money—then active investors are usually the ones that do it. However, active investors are also the ones that come last.

So think about that: passive investing—you’re never going to be the superstar, but you're still going to do very, very well over time. Plus, you already know your strategy; you could formulate a passive investing strategy in the next two minutes, and that could serve you very, very well for the next 30, 40 years. And you don't have to sink all of that time and all of that discipline into maintaining an active portfolio.

And that is why I think, despite myself personally being more of an active investor, that's why I think for most people passive investing just wins. Basically just wins every single time, and I hope you understand that kind of reasoning. I'd like to hear your thoughts and opinions as well.

Overall, I think that passive investing has a real—has a lot going for it. It is a really fantastic strategy, and it has worked. You know, it's not like it's just worked very well over the past 10 years—no, it's worked well over the last 20, 30, 40, 50, 60 years. It is a proven strategy; it is the world's most popular investing strategy nowadays, and it's been proven for a very, very long period of time.

So anyway guys, that is what I've got to talk about for this video. I'd love to hear your opinion on it. What do you think about passive investing? What do you think about active investing? Which one do you more subscribe to? Of course, a lot of people do both, like I do both. I'm both a passive investor in part and an active investor in part. But what do you subscribe to? I'd love to hear from you guys, so leave that stuff down in the comment section below.

And there we go. That is day four wrapped up of the new money advent calendar. Thanks very much for tuning in. Of course, subscribe to the channel. Leave a like on the video, first of all, if you did enjoy it or if you found it useful, then subscribe to the channel if you'd like to stay up to date with all of the videos that are going to be coming out over the next couple of weeks in the lead-up to Christmas.

Hit the notification bell so you get notified when videos come out. Obviously, I'm doing a video a day, so the content schedule is going to look a lot different to what it normally is. So there'll probably be a fair few videos coming out at different times, so not always just, you know, the 8 o'clock in the morning that I use or 8:30 in the morning that I usually aim for.

So definitely hit the notification bell so you can see immediately when the videos come out. But that's it for me, guys. Thank you very much for watching, and I'll see you tomorrow.

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