The haystack
Also called: buy the haystack, don't pick the needle
Owning the whole market rather than trying to pick the one company that wins.
The image comes from the old line about finding a needle in a haystack. Somewhere in the market is the company that will do extraordinarily well over the next thirty years. Finding it in advance is the needle problem, and almost nobody solves it.
So don’t. Buy the haystack — own a little of everything, and the needle is automatically yours along with all the straw.
That is the plain idea underneath an index fund. You are not giving up on the winner; you are declining a search you would probably lose, and accepting the market’s average instead. Since the average includes every winner, the average turns out to be rather good.
The cost of the haystack is that you also own the failures. That feels like a flaw and is the price of the arrangement: no single collapse can sink you, because no single company is a large part of what you hold.
It is also why the approach is cheap. Nobody is being paid to search.
Words on this page
- Diversification — Spreading money across many holdings so that no single failure can do serious damage.
- Market — All the buyers and sellers of an asset together — nobody sets the price from above.
- Index fund — A fund that holds everything in a defined market in proportion, instead of choosing what to buy.
Related terms
Covered properly in Learn.
This term appears in the glossary of The Quiet Fortune, Volume I.