How the Stock Market Works, or the Myth of the Active Investor

Y’all, whenever I talk about the stock market being passive income, some bro shows up to valorize how much time an active investor spends on research.

This active investor is mostly a fiction.

The vast majority of individuals with stock holdings are buying ETFs or Mutual Funds, or received shares through an employer. (Or they’re indirectly invested through their insurer or pension.) They are not reading whitepapers and intensively researching investments in individual companies. What they are doing is not dissimilar from putting money in the savings account with the best interest rate and the lowest fee.

I know we’ve all seen exciting movies with people shouting on trading floors. But I know a lot of people (and I bet you do too) who have tried active investing, and almost all of them talked openly about how it was their “playtime” and treated it like going to the casino, clicking to buy things that were going up or down or had cute names, only risking money they were willing to lose. For money they were serious about, they’re in ETFs and Mutual Funds because they know they can’t beat the market and prefer a diversified portfolio.

Which is managed by someone else. Maybe a computer program.

So, you know, if you have a dream that through your insight and research you’re going to turn $100 into a fortune and the prettiest girl in town is going to swoon (maybe because she’s you! you can be a pretty girl and this fantasy still works!), that’s all well and good. But it’s not representative of most investors. Who are passive. Whose money does not come from working harder at understanding money.

Most of them don’t even fill out their own taxes, gosh.

(I’ve offered anecdotal evidence here as a kind of “search your feelings; you already know this” but my statements about the extremely low percentage of active investors in the market are data-driven. Look up any chart you want.)