Except this is a myth. You will not win the lottery without taking crazy amounts of risk. The active managers who do beat a major index for a long, long time almost do not exist in retail space, and they beat the market by a tiny amount (~1%). In my era Legg Mason was the most famous, but even they fell too.
Buffet isn’t a passive investor. Berkshire Hathaway have often taken a very active role in the running of their acquisitions - appointing managers, setting strategy, merging/splitting off subsidiaries, etc. This is as much managing as investing. If Buffet was a pure stock picker, then he would be an interesting case in the active vs passive investment debate.
When you own one billionth of a company you are just along for the ride. When you buy a 10% or more stake you can influence the running of the company. Another aspect is he has offered liquidity to distressed companies like GE and got richly rewarded for it with favorable terms.
Yeah, I have tried to simulate this several times under different conditions. Given zero sum game and random odds, there is always going to be small percentage who have a lot and most will have below what they started with. It is easy to explain as well, if you for example start with $1000 and you have 50% odds of winning 10% every time. If you win and lose 50% you are going to be below what you started.
If you always win after lose and lose after win, then it would go like this:
1. $1000
2. $1100
3. $990
4. $1089
And so on... After 100 turns you would have only around 600 - 700.
But it's a zero sum right. Where does the 300 - 400 go? It goes exponentially to select few who by random chance have more wins than losses.
In fact the longer it goes on, the higher odds of there being outlier with a lot - you might expect that everyone would converge around $1000, but that is not the case.
I did an example run with 10 000 investors, each doing 1000 trades, each trade they bet 10% of their portfolio, with 50% odds of winning.
First investor had 562 wins and 438 losses, with $1,666,061.
Median investor had only $7 left with 500 wins and 500 losses.
Top 10th percentile investor had $364 with 520 wins and 480 losses.
So interestingly even an investor that had 40 wins more than losses, lost 2/3 of portfolio.
> How does that explain Warren Buffet’s spectacular success?
Buffett buys “cheap, safe, high-quality stocks” with leveraged “financed partly using insurance float with a low financing rate” [1]. TL; DR He’s doing private equity with discipline.
For most people who are saving for retirement between the ages of (say) 30 to 65, that's most of their investing lifetime, and such underperform could radically effect the life they can live once they start working. Do you want risk your proverbial Golden Years simply because you chose not to take the market average returns?
2. While Buffett is a better-than-average investor (and certainly better than me), the main reason why we know him is because he's so rich, but as Morgan Housel notes, the vast majority of that wealth has come from compounding:
> As I write this Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s. Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him. Consider a little thought experiment. Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million, or $9.3 million adjusted for inflation.[16] What if he was a more normal person, spending his teens and 20s exploring the world and finding his passion, and by age 30 his net worth was, say, $25,000? And let’s say he still went on to earn the extraordinary annual investment returns he’s been able to generate (22% annually), but quit investing and retired at age 60 to play golf and spend time with his grandkids. What would a rough estimate of his net worth be today? Not $84.5 billion. $11.9 million. 99.9% less than his actual net worth. Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. His skill is investing, but his secret is time. That’s how compounding works. Think of this another way. Buffett is the richest investor of all time. But he’s not actually the greatest—at least not when measured by average annual returns.
