DividendGrowthJourney

One observation I have always thought is funny: People are quick to acknowledge the S&P500 and QQQ are very difficult to beat, some say it's nearly impossible to beat. But investors rarely point out that the index never looks at PE ratios or valuations, ever. The Index only market cap weight stocks. How can an index, that does not factor in valuation at all, do well over such a long period of time? Isn't it essential to be focused on valuation to have a winning investment strategy? The answer is the index gives more weight to more successful companies as they grow, meaning that an index will naturally prioritize holding compounders as the largest positions and they will never sell them based on valuation. The index structure of prioritizing winners and holding them long-term is the winning strategy. The error that individual investors so frequently make is doing the exact opposite of the index: - They prioritize low-quality "cheap" companies that eventually fall off. - Instead of selling losers, individual investors buy them up, because they're "cheaper" than the winners. - They sell winners because they have become too expensive, selling out of winners leads to a portfolio full of losers. - They are hyper-focused on valuation while the index, which beats out individual investors, has zero focus on valuation. Individual investors do the exact opposite of the index, and then point to the index and say "look, nobody can beat the index! It's too difficult!!". I'm not suggesting that all valuations should be ignored. But perhaps a greater emphasis on holding winners, selling losers, and investing with a longer-term perspective would help the average investor's return.