Can We Really Beat the Market?

Indexing vs. Enterprising Investing: My Takeaway from The Intelligent Investor

Over the past couple of months, I’ve been reading The Intelligent Investor by Benjamin Graham. One theme that keeps coming up is Graham’s back-and-forth stance on whether investors should become “enterprising” or simply stick with indexing. Let’s define both terms before diving deeper.

An enterprising investor, according to Graham, is someone who actively analyzes and researches individual stocks in pursuit of returns that exceed the market average. Historically, the stock market has returned about 10% annually—an impressive figure that’s tough to beat on a consistent basis.

Indexing, on the other hand, involves investing in mutual funds or exchange-traded funds (ETFs) that hold a diversified basket of stocks. When you invest in an index fund, your money is spread across all the companies in the index.

While mutual funds and ETFs serve a similar purpose, they differ in structure:

• ETFs trade like individual stocks during market hours and typically carry lower management fees.
• Mutual funds can only be bought or sold at the end of the trading day and may have slightly higher fees.

Enterprising Investor vs. Indexing: Pros and Cons

Enterprising Investor

Pros:

• Full control over the portfolio
• Ability to choose specific companies and portfolio weightings
• Potential to beat the market through superior stock selection

Cons:

• Requires significant time, effort, and discipline
• Many retail (and even professional) investors fail to outperform the market

Indexing

Pros:

• Simple, “set-it-and-forget-it” investing
• Minimal time required to manage
• Almost guaranteed to match market performance (which is historically strong)

Cons:

• No chance of beating the market
• Limited control over which companies you’re invested in

Why Even Try to Beat the Market?

Beating the market is notoriously difficult. A 2023 study by Hendrik Bessembinder analyzed 28,114 U.S. stocks from 1926 to 2022. Of those, 16,481 companies—roughly 59%—actually lost money for shareholders. Even more surprising, just 40 companies accounted for over 40% of all wealth created during that period. That’s only 0.14% of all the stocks studied.

With odds like that, why would anyone try to pick individual stocks instead of just buying the whole market?

The answer is simple: some people genuinely love analyzing businesses and enjoy the intellectual challenge of trying to beat a nearly unbeatable system. We may not be Warren Buffett, but that doesn’t stop the average person from playing golf just because they won’t be Tiger Woods.

My Experiment: Two Portfolios, Two Philosophies

To see how active investing stacks up against indexing, I’ve decided to run two parallel portfolios:

1. Individual Stock Portfolio – This is an actively managed portfolio that I’ve already been running for a few months. Moving forward, I’ll be adding an extra $100 per month, on top of my usual dollar-cost averaging (DCA) contributions. This extra cash will be reserved for deploying during significant market dips. You can follow this portfolio by subscribing to my newsletter on Substack or through my website [here].
2. Index ETF Portfolio – This portfolio will consist of a diversified mix of ETFs. Like the stock portfolio, I’ll DCA $100 into it each month and set aside another $100 in cash for buying opportunities during market downturns. This portfolio will be tracked via a free monthly newsletter, which you can access [here].

I’ll be comparing the performance of both portfolios over time, alongside major market indexes, to see which strategy offers better real-world results—active stock picking or passive indexing.