You have to be a professional investor ‘to do well’: Bruce Greenwald

Columbia Business School Professor Bruce Greenwald joins 'Influencers with Andy Serwer' to discuss the stock market and modern investing.

Video Transcript

- But why? If markets are efficient, then why does Buffet say that you should invest in an index fund?

- Oh OK, and I think that's a good point. To do well, to be on the right side of the train, you have to be a professional investor. So I'll say something that ironically should absolutely dominate the investment world and doesn't, which is, if I'm going to be on the right side of the transaction more often than not, I probably ought to be a specialist.

So you don't have internal medicine guys doing orthopedic surgery. Medicine law is highly specialized. And if I've spent my whole life trading on shore South Texas, Gulf Coast oil leases, and that's all I do. And you fly in from Germany and buy an oil lease from me. Who do you think made money in that transaction?

- Right.

- And the idea of specialization plays no role in academic finance. Adam Smith, notwithstanding.

- But does this suggest that for ordinary investors, then they should pretty much stick to index funds maybe, unless you're in a field? Like say, you're a dentist, and you see that this new product is going gangbusters. And people don't seem to realize it, and then you buy that stock.

- That is a very good way to put it. The problem, of course, with that is, once the dentist does that in dentistry, he decides he's a market genius, and he decides he can do it at every price. Now, you have to be incredibly disciplined about why you're the person who's going to be on the right side of the trade. And most part time investors are not equipped to do that. But if you just buy the index, you can't be on the wrong side of the trade.

- Right, right.

- And it prevents you from overinvesting in the glamour stocks, and that's the sense in which Buffet is absolutely right.