3.1 Knowledge and the learning curve

If you take a random walk down Wall Street, you'll soon discover that the average amateur investor doesn't know what he's doing. To make money in the stock market, everyone knows you must buy low and sell high. Yet year after year, the wolves fleece the lambs out of millions of dollars. It's well documented that the little guys meaning you and I are usually wrong at critical turning points in the market.

Many institutional investors don't do much better either. Most pension fund managers, mutual fund portfolio managers, and professional money managers have displayed an uncanny inability to beat the market consistently year after year, though many command annual salaries over a million dollars.

Studies have shown that index funds, which invest in securities represented by an index such as the Standard & Poor's 500, have outperformed 77 percent of all mutual funds on a long-term basis. Despite the hype in the financial world about hot investment opportunities, the published records elucidate a stark reality: Most of us can do about as well as any other investor, amateur or professional, by throwing darts at the stock pages of the newspaper and buying the stocks found thereunder.

Although it is extremely difficult to beat the market consistently, some do. Peter Lynch, renowned former manager of the Fidelity Magellan Fund, racked up an impressive record in the 1980s, making his clients very wealthy. Warren Buffett,...