Warren Buffett Says "The Stock Market is Designed to Transfer Money from the Active to the Patient" and the Numbers Prove He is Right

Warren Buffett, often referred to as the "Oracle of Omaha," has consistently championed the virtues of patience and long-term investing over the fast-paced, high-risk world of day trading. His words carry weight, especially when backed by a track record of turning Berkshire Hathaway into a financial powerhouse.

“The stock market is designed to transfer money from the active to the patient,” Buffett famously said, encapsulating his philosophy that long-term investing far outweighs the temptation of short-term gains.

The Harsh Reality of Day Trading

While day trading often appears glamorous, the statistics paint a grim picture for most who attempt it:

• Less than 1% of day traders consistently profit after fees.
• About 4% make a living, though not necessarily a lucrative one.
• Only 1.6% are profitable in an average year.

Studies show that over 97% of day traders lose money over time. Despite this, many are drawn to the liquidity and perceived control offered by frequent trading. Buffett, however, believes this liquidity can be a trap. “There’s a temptation for people to act far too frequently in stocks simply because they’re so liquid,” he said.

The Power of Patience and Long-Term Thinking

Buffett’s approach is the antithesis of the day trader’s rapid transactions. Instead, he advocates for a low-touch, high-impact strategy: buying into strong, well-run companies and holding them for the long haul. “The main thing to do is just buy into a wonderful business and just sit there with it,” he advised.

Reflecting on his first stock purchase in 1942—three shares of Cities Service for $114.75—Buffett once told CNBC: “The best single thing you could have done on March 11, 1942, when I bought my first stock, was just buy an index fund and never look at a headline, never think about stocks anymore.”

Buffett’s “No Called Strike” Philosophy

One of Buffett’s favorite analogies comes from baseball. Citing Ted Williams’ The Science of Hitting, he explains that investing is a “no called strike business.” Unlike baseball, where players must eventually swing at a pitch, investors can wait indefinitely for the perfect opportunity.

“I can look at 1,000 different companies, and I don’t have to be right on every one of them, or even 50 of them,” Buffett said. “The only way I can have a strike called is if I swing and miss. So I can pick the ball I want to hit, and I can wait there. That’s an enormous advantage over most businesses.”

Low-Cost Index Funds: A Simple Strategy for Most Investors

For those who lack Buffett’s expertise or time to analyze individual stocks, he recommends low-cost index funds. “Both large and small investors should stick with low-cost index funds,” Buffett wrote in his 2016 letter to shareholders, noting that high fees charged by actively managed funds primarily benefit the managers, not the investors.

He has frequently praised the Vanguard S&P 500 ETF (VOO) as an ideal choice, offering broad exposure to top U.S. companies with minimal expense. Since its inception, VOO has achieved an average annual return of 13.58%, underscoring the power of simple, diversified investing.

The Long-Term View in Action

Buffett’s own career is a testament to the success of long-term investing. Berkshire Hathaway’s Class B stock (BRK.B), which provides smaller investors access to his investment strategy, has risen approximately 204% over the past decade.

In his 2023 Thanksgiving letter, Buffett described Berkshire as “one of the largest and most diversified companies in the world,” lauding its longevity and resilience. “Decay can occur at all types of large institutions... But it is not inevitable. Berkshire’s advantage is that it has been built to last,” he wrote.

Avoiding the Noise

Buffett urges investors to focus on the fundamentals of businesses rather than getting distracted by dramatic headlines or market volatility. This advice feels especially prescient given the global pandemic, economic uncertainty, and rapid technological advancements of recent years.

“The best single thing you could have done...was just buy an index fund and never look at a headline,” Buffett reiterated, highlighting the dangers of overreacting to short-term news.

The Bottom Line

For the average investor, Buffett’s guidance is clear: patience, discipline, and a long-term perspective are the keys to success. Whether through low-cost index funds or carefully chosen individual stocks, the goal is to focus on businesses that will thrive over time.

As Buffett himself quipped in 1991, comparing day trading to investing is “like calling someone who repeatedly engages in one-night stands a romantic.” For those seeking lasting returns, the message is clear: stay patient, stay invested, and let time work its magic.