Well, at least Dilbert’s creator, cartoonist Scott Adams, thinks that indexing makes more sense for most investors than picking individual stocks.

In characteristic overstatement, he suggested on his blog that someday it could be illegal for individuals to buy individual stocks, given the harm they might do themselves. He argued that the odds of beating the market are so slim that picking individual stocks is a form of gambling.

Not surprisingly, his musings drew critics. In a follow-up posting on the criticisms, “Warren Buffett and You”, Mr. Adams noted that some writers pointed out that Warren Buffett’s track record proves that individuals can succeed in beating the market.

That posting, in turn, reminded me of some of Warren Buffett’s own comments about indexing.

For example, in his annual letter to shareholders for 1996, the chairman of Berkshire Hathaway Inc. wrote: “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”

Three years earlier, in the same vein, Mr. Buffett wrote: “By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”

No one should be forced to index, naturally. But given how few Warren Buffetts have emerged over the years, the odds do seem very much stacked against outpacing the market averages. Index investing, of course, provides no protection from market downturns. But it ensures participation in market upturns, and does not add the insult of high costs to the injury of down markets.

In the interest of full disclosure, I’d note that we’re fans of Mr. Adams’ humorous slant on investing, and Vanguard paid him for a couple of investment-themed Dilbert strips that were used in our Plain Talk on Investing video series.


Investments are subject to risk.

Links to Dilbert.com and BerkshireHathaway.com will open new browser windows. Vanguard is not responsible for content on third-party sites. Opinions expressed by Mr. Adams and Mr. Buffett are not necessarily those of Vanguard.

We invite your comments on this Vanguard Blog entry. Comments will be monitored and published at Vanguard’s discretion. Comments received prior to July 7, 2009 will not be published.