Becoming A Top 4% Investor
Lately, we’ve received a variation of the same call a dozen times.
The conversation starts with wanting to know if we are taking a position in energy, especially small modular nuclear reactors. The next question asks about exposure to quantum computing or artificial intelligence.
These things have the capacity to change the world. However, changing the world does not mean they are good investments. This is a hard concept for people to digest.
In 1999, Warren Buffett published a great article in FORTUNE magazine (linked here: FortuneMagazine.pdf).
Although the entire article is worth reading, Buffett makes key points that are relevant today. Consider the invention of the automobile, airline or internet. All changed the world. However, they were all terrible investments and took decades to become viable businesses.
Given this, virtually every time you turn on the news, someone is gushing about who is developing a modular reactor to power a data center. Another show discusses quantum computing while another is proposing no one will work again because of artificial intelligence.
This should cause an alarm to go off in your head. They are intriguing ideas, but ones that remind us of 1999. In the dot.com days, you didn’t need earnings. In many cases, you didn’t need sales. You just needed an idea that could ride the wave of hype.
In the FORTUNE article, Buffett said, “Perhaps you are an optimist who believes that though investors, as a whole, may slog along, you yourself will be a winner. That thought might be particularly seductive in these early days of the information revolution (which I wholeheartedly believe in). Just pick the obvious winners, your broker will tell you, and ride the wave.”
If only it were that easy.
Earlier this month, Amazon announced plans for a small modular reactor with X-energy. Amazon said the project will start sometime before the end of the decade while operations will start in the 2030’s.
As of 2025, OpenAI is projected to generate approximately $12 billion in revenue. However, profits were negative $5 billion in 2024 with projected losses of $14 billion by 2026.
Similarly, functional quantum computing is estimated to be ten to fifteen years from now. Only once quantum computing becomes a viable technology can a business be built around it.
As you digest this information, consider a few facts.
Hendrik Bessembinder, a professor at Arizona State, studied more than 29,000 publicly traded companies from 1925 – 2023 searching for high performance companies. His conclusion is fairly shocking. A mere 4% of all companies produce returns greater than the US Treasury Bill.
Another study found that more than half of all public companies delivered negative returns and the most frequent outcome for an individual stock is a 100% loss.
I am not saying the same fate will fall upon the “fun ideas” of today. But they are the kind of thing that once the air is let out of the balloon, can fall 50% in the blink of an eye.
As you move forward, if your main interest in a stock or industry is mainly predicated on some meteoric rise over the last year, stop. Instead of obsessing over what happened in the past, ask yourself in a calm and rational manner…. what will happen next?
If you cannot answer what will happen next, you are suffering from the fear of missing out. Don’t get pulled into that game.
When managing your portfolio, understand that “moon shots” are lottery tickets. The odds are heavily against you. As such, if you are going to allocate hard-earned savings to a moon shot, size them accordingly. And be okay with a return of zero.
Lastly, famed investor Howard Marks shared a story in his memo “Fewer Losers, or More Winners?”
In this memo, Marks talked about an unremarkable pension fund manager. For 14 years, this manager was never above the 27th percentile of investors and never below the 47th percentile.
If you were asked what his percentile returns were after 14 years, you might assume it is the mid-point of about the 37th percentile.
However, despite never having a top-performing year, the manager’s overall consistency placed him in the 4th percentile for the entire 14-year period.
This story highlights what both Buffett and Marks practice. Achieving superior long-term results is about consistency and discipline, rather than chasing the hot stock or a hot manager.
Dave Sather is a Certified Financial Planner and the CEO of the Sather Financial Group, a fee-only strategic planning and investment management firm.
