In a parallel universe, the stock market has thousands of companies. Nobody knows which ones to buy, how many to buy, or what weight each one should have in a portfolio. Analysing every company individually is exhausting. Choosing stocks is hard. True.
Then, one beautiful day, an analyst named “Averaged Investor” (AI for short) came up with a remarkably simple idea — simple, yet just logical enough:
The bigger the company, the bigger the weight.
If there are 1,000 companies in the market, he buys all 1,000. No stock picking. No “conviction.” No agonising over whether Company A deserves 4.7% or 5.2%.
Why waste brain cells?
Meet the Investor Who Never Picks a Stock
Nobody could prove his method was bad.
Except, of course, for the minor inconvenience that he owned way too many stocks.
Nobody could say his portfolio was the best either, because the logic was almost offensively simple.
And nobody really knew whether randomly picking ten stocks and giving them equal weights would actually do better than AI’s portfolio.
So, day after day, AI’s portfolio went up sometimes and down sometimes. But over time, it generally went up.
And AI, the portfolio manager, lived a wonderfully peaceful life.
He didn’t need to read 200-page equity research reports.
He didn’t need to build a 47-tab Excel model.
He didn’t need to debate whether the stock was worth 13.5x or 14.2x forward P/E.
He just bought all the companies.
The Industry That Built Itself to Beat a Formula It Couldn’t
Then, one day, the asset management industry became enormous, with trillions of dollars under management.
Brilliant fund managers appeared everywhere, proudly displaying their lofty IQs and capabilities. They developed increasingly sophisticated models, ran complex optimisations, performed deep fundamental analysis, debated entry points and exit points, and generally made investing look like rocket science.
And the funniest part?
They were all trying to beat AI’s simple portfolio.
Even more infuriatingly, AI’s completely brain-dead portfolio, which no textbook had ever described as particularly clever, had absolutely no problem punching these brilliant professionals in the face year after year.
Sometimes the funds beat AI.
Sometimes AI beat them.
But over sufficiently long periods, this wonderfully stupid portfolio kept coming back.
And the funds kept having to explain themselves.
What AI’s Portfolio Really Is
AI’s portfolio, of course, represents the stock indices we all know and love: VN-Index, S&P 500, ASX 200, and so on.
The recipe is essentially the same:
The bigger the market capitalisation, the bigger the weight.
That’s it.
No profound insight.
No sophisticated optimisation.
No rocket science.
Just a remarkably simple formula applied consistently to a chaotic world.
And yet an entire gigantic financial industry has spent decades trying to beat it.
And, so far, there is no sign that this stupid little formula is going anywhere.
A Thousand Flavours of the Same Guess
Of course, AI was not alone.
Soon enough, other people started inventing their own wonderfully arbitrary ways of constructing portfolios.
“Let’s just buy every company in this industry.”
→ Industrials Index, Financials Index, etc.
“Let’s buy companies with high exposure to this particular characteristic.”
→ Value, Momentum, Quality, Dividend, Diamond, and a thousand other flavours of indices.
Each portfolio has its own philosophy. Each manager has their own story. Each methodology comes with its own impressive terminology and enough Greek letters to make it look like rocket science.
And yet, many of them are essentially just different ways of saying:
“I have decided to put these stocks together because… well… it seemed reasonable at the time.”
Each one claims a kingdom.
Each one wins sometimes.
Each one loses sometimes.
And very often, nobody can definitively prove which one is the superior portfolio.
Scientific Is What Works, Not What Sounds Clever
At some point, you have to admit:
Maybe a lot of investing is just sophisticated storytelling wrapped around a portfolio.
So if one day you start investing, randomly pick 20 stocks, give them some completely ridiculous weights, and someone tells you:
“That’s not scientific.”
Tell them this nonsense story.
Because whether something is “scientific” or “unscientific” is ultimately determined by what happens after you invest, not by how impressive the methodology sounds beforehand.
Just look at the index.
A hilariously simple formula that basically says:
“Buy everything. Give more money to the bigger ones.”
And somehow the entire world has spent decades chasing it.
If you can consistently beat the index, congratulations.
Because you have successfully defeated the completely brainless formula that was apparently too stupid to know it wasn’t supposed to win.
Where This Leaves You as an Investor
That question — how much of a portfolio should sit in simple, broad index exposure versus active or specialist strategies — is exactly the kind of thing investment portfolio management should help you work through, based on your own goals, timeframe and risk tolerance rather than on how convincing a story sounds.
Past performance, including the long-run performance of any stock index, fund or investment strategy mentioned above, is not a reliable indicator of future performance.
General Advice Warning: This information is general in nature only and does not constitute personal financial, legal, or tax advice. It has been prepared without taking into account your individual objectives, financial situation, or needs. Before acting on any information, you should consider its appropriateness having regard to your objectives, financial situation, and needs, and seek professional advice from a licensed financial adviser and registered tax agent.
This information is provided by Infinite Zephyr & Wealth Pty Ltd (ABN 12 628 624 279), an Authorised Representative (AR 001268024) of NDT Capital Pty Ltd (AFSL 558899). You can verify this authorisation on the ASIC Financial Advisers Register. For dispute resolution, contact the Australian Financial Complaints Authority (AFCA).