The late Charlie Munger, renowned investor and vice chairman of Berkshire Hathaway (NYSE:BRK), once asserted that 95% of investors stand no chance of outperforming the S&P 500 Index.

What Happened: During an interaction a few years ago, Munger shared his thoughts on the challenges investors face in trying to outperform the market. Munger, who passed away in 2023, was a close associate of Warren Buffett, and his advice remains highly valued in the investment world.

Munger acknowledged the dominance of index funds like the S&P 500, which represents a significant portion of the market.

He warned against the risks of excessive popularity in index investing, drawing parallels to the Nifty Fifty era, where a narrow focus on a select group of stocks led to unsustainable market conditions and subsequent downturns.

“95% of people have no chance of beating the S&P 500 Index. The index funds of the S&P, it's like 75% of the market. But is there a point where index funds theoretically can't work? Of course. If everybody bought nothing but index funds, the whole world wouldn't work as people expect," Munger said.

"If you get too much faddishness in one sector or in one narrow index, of course you can get catastrophic changes like they had with the Nifty 50 in that former era," he added. "I don't see that happening when the index is three-quarters of the whole market. The problem is the whole thing can't work perfectly forever, but it will work for a long time."

Also Read: Charlie Munger’s Financial Success and Longevity Advice: ‘My Game in Life Was Always To Avoid All Standard Ways of Failing’

“One of the reasons you buy a big index like the S&P is because if you buy a small index and it gets popular, you have a self-defeating situation. When the Nifty 50 were the rage, JP Morgan talked everybody into buying just 50 stocks and they didn't care what the price was, they just bought those 50 stocks. Of course in due time, their own buying forced those 50 stocks up to 60 times earnings whereupon it broke and everything went down by like two-thirds quite fast," he added.

"I would hate to manage a trillion dollars in the big stocks and try and beat the indexes. I don't think I could do it. In fact, if you look at Berkshire, take out a hundred decisions, which is like two a year, the success of Berkshire came from two decisions a year over 50 years," Munger continued while talking about S&P.

As index investing gained popularity, Munger observed a downward trend in fees for managing large portfolios. He highlighted the challenges facing investment professionals who must adapt to a changing landscape where fee structures are increasingly competitive.

"We may have beaten the indexes, but we didn't do it by having big portfolios of securities and having subdivisions managing the drugs and subdivisions, and so the indexes are a hell of a problem for you people, but you know, why shouldn't life be hard?" he said.

Why It Matters: Munger’s insights underscore the formidable challenges inherent in trying to beat the S&P 500 Index. While index funds offer benefits such as diversification and cost-effectiveness, they also present hurdles for investors seeking to outperform the market.

The rise of index investing has led to a competitive fee environment, putting pressure on investment professionals to adapt and innovate.

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