The Famous Warren Buffett Quote About Monkeys Winning in the Stock Market

Famed investor Warren Buffett has a sense of humor — and a way with words. The chairman and CEO of Berkshire Hathaway is known for sharing complex investing topics simply and artfully. He uses that skill in interviews and in his annual letter to Berkshire Hathaway shareholders.

Buffett’s 2020 shareholder letter includes a lesson for investors that’s worth revisiting in 2022, given the current state of the stock market. This is what he said:

Indeed, a patient and level-headed monkey, who constructs a portfolio by throwing 50 darts at a board listing all of the S&P 500 will — over time — enjoy dividends and capital gains, just as long as it never gets tempted to make changes in its original “selections.”

Read that quickly and you may think it’s a joke. But in true Buffett style, he’s delivered a four-part investing class in fewer than 50 words. Read on for my breakdown of the takeaways.

Image source: Getty Images.

1. Process trumps expertise

It’s significant that Buffett chose a monkey as the star of his story. The investing monkey is not a slick Wall Street pro who’s armed with real-time data and algorithms. Just the opposite, the monkey presumably has no financial expertise, given that it picks securities by throwing darts.

What the monkey does have is a process. And following that process to the letter is how the monkey generates dividends and capital gains over time.

2. Choose quality

As a first step, the monkey chooses quality assets. Yes, there are darts involved, but the random selection is taken from S&P 500 stocks. These are the largest, most successful public companies in the country. Many of them have longevity, financial strength, loyal customers, and experienced leaders — qualities associated with long-term share price appreciation.

3. Diversify

Buffett’s monkey invests in 50 S&P 500 stocks. That means each stock comprises just 2% of the overall portfolio to start. Diversifying across that many positions protects the monkey if any one of those companies fails. Even if two or three stocks lost all their value, the monkey would see a dip of less than 10%.

4. Buy and hold, no matter what

The monkey’s returns develop over time, and only if the original stocks aren’t traded away. To translate that into investor-speak, the monkey is practicing buy-and-hold.

The buy-and-hold approach generates earnings by riding the natural, long-term growth of the stock market. That growth averages about 7% annually after inflation.

Importantly, the 7% average is more reliable over longer timeframes. In any one year, the stock market could be down by double digits. In the next year, share prices could rise by double digits. These ups and downs average out to 7%, but it can take 10 or 20 years for that to happen.

This is why Buffett’s monkey must be “patient and level-headed.” Effective buy-and-hold investors don’t panic and sell when the market gets volatile. They know growth potential increases the longer they hold their positions. Plus, selling would take them out of the running for recovery gains that follow downturns.

In short, it’s critical for buy-and-hold investors to stay invested and stay the course. Riding out market turbulence is how you use the market’s long-term average growth to your advantage. It’s also the simplest way to come out ahead on the other side of a correction.

Invest like a…monkey?

You don’t need deep expertise (or darts) to build wealth in the stock market. You do need patience and a process, however. Fortunately, the buy-and-hold approach makes for a simple process. Invest in a diversified group of quality stocks consistently for decades, even through down markets.

Buy-and-hold may not have made monkeys rich, but it has made millions for ordinary and extraordinary investors. It can do the same for you, too.

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