It’s not often that I venture into a grocery store.
When my wife and I split up the chores early in our relationship, I tipped my hand when I said, “I’ll do anything not to have to go shopping.” Something about the parking, making hundreds of micro-choices inside the store, the feeling of being herded through like cattle; the whole thing drives me nuts. So now my wife does the shopping, and I do just about everything else (she may dispute this).
Unfortunately, I still occasionally find myself in stores. Recently I had to brave not one, but two stores in a single trip: a grocery store to pick up some condiments, and Best Buy to get some signal converters to keep my creaky old electronics working on new televisions. As an outsider to the world of shopping, I like to think I notice small differences that the regular shopper takes for granted. Like lines, for example.
The grocery store in my town has over a dozen checkout lines, along with the requisite “12 items or less” line and some new-fangled self-checkout kiosks. Each line is self-contained, and I noticed shoppers making laps by the checkout aisles before picking a line to wait in.
For these shoppers, who I’ll call “line hustlers,” some information was known, such as the length of each line and the fullness of each cart. Other information was unknown: which shoppers would pay with checks, or squabble about the posted price of vine-ripened tomatoes versus the organic ones. You could see the mental wheels spinning as each shopper assessed all the variables to make the best decision they could.
I found none of this line-hustling at Best Buy. Instead, I found a single line, which I’ll dub the Super-Line. Everyone waited in the Super-Line, winding past the same kiosks drooping over from the weight of cheap DVDs and batteries. At the end of the Super-Line, five cashiers served whoever was next. Everyone waited roughly the same amount of time. If one shopper decided to try five different credit cards before buying something, everyone in the Super-Line absorbed that extra wait time equally.
From an efficiency standpoint, Best Buy and their Super-Line probably win out over the grocery store system. I prefer to just wait in one line and avoid the hustle. But there is a certain type of person who likes to try to ‘win’ at picking a checkout line.
It struck me while I was shopping that these different types of lines resemble different ways of investing.
The grocery store resembles the world of individual stock investing. Investors walk the aisles of the market, scoping out each stock. They have plenty of publicly available information, as well as their intuition. A good stock picker is the equivalent of someone who enters a long line because they see that three of the people have just a few items, and two have their credit cards ready in their hands. A good stock picker, like a good line hustler, should be able to pick better than the average.
The Best Buy Super-Line reminds me of low cost index funds. They’re efficient and average out the performance of large market sectors. Each person who buys an index fund will receive the same performance as everyone else, just like the customers waiting in the Super-Line. The index fund rules out both your best case and worst case scenarios; instead, you get the average with a minimum of fuss or expended brainpower.
Which type of investing you prefer, as with which checkout line you prefer, has a lot to do with your temperament and belief system. There’s no right or wrong answer, but unsurprisingly, I prefer index investing. Here’s why: the average stock picker probably has less information than the grocery store line hustlers. They definitely have less unique information; anything you know about a company is known by thousands of other people, at least.
And stock picking is less efficient. All that buying and selling, with money sitting on the sidelines, has costs. What people at the grocery store fail to realize is that the laps they do to assess each line aren’t separate from their wait time; they add to it. Most of them would be better off immediately jumping into the nearest average-sized line.
Likewise, most investors would benefit from dropping the hustle and embracing the Super-Line method of investing.