64 | In Defense of Indexing: More Humility than Naivete

Indexing is a style of investing in which, instead of intentionally selecting a subset of companies from a group, you decide to own the entire group.

Groups of companies come in all shapes and sizes - a group could be all of the big companies in the United States, all of the energy companies in the world, all of the small companies in developing countries, or any other combination of geographies, industries, or company sizes.

Indexing is more humility than naivete.

Carl Richards says, "Risk is what's leftover after you've thought of everything."

The list of things that could cause any single company to fail is literally endless.

To name a few...Pandemic. Natural disaster. Bad product launch. Poor culture. Bad accounting. Unexpected lawsuit. Rogue employee. Cyber security breach. Volatile CEO. Bad relationship with a supplier. Angry customers on social media. New legislation. Rising interest rates. Falling interest rates. And a million more things.

To even pretend that someone could have a pulse on this endless list of things that could go wrong is almost comical. If the CEO of a company can't do it, how in the world is an investor outside of the company going to have a chance of doing it?

This is the challenge of selecting 1 company to perform well, much less a portfolio of 30, 100, or 500 companies.

On top of that, this only addresses the "numbers" side of the investing equation. Gleaning from Morgan Housel, the "story" side of the equation is just as vital and depends on the past, current, and future emotions, feelings, thoughts, and beliefs of the 7+ billion people on the planet and their perception of each business.

If you thought evaluating the company for its merits alone was challenging, good luck trying to reconcile your analysis to the rest of the world.

Indexing acknowledges that all risks that can run a business into the ground are created equally and that trying to keep tabs on them all is an endless, time-consuming endeavor.

Instead of attempting to play an unwinnable game, indexing is a humble acknowledgement that a game that can't be won does not need to be played.

Additional Reading

The natural size by Seth Godin

A Number From Today and A Story About Tomorrow by Morgan Housel

Market forecasting isn’t like the weather… by Carl Richards