4 Lessons That Warren Buffett’s “Lucky Monkey Problem” Teaches Investors

The internet is flooded with people flaunting supposed stock gains, crypto wins, and startlingly profitable options trades. Some sell courses, while others want you to subscribe. But even if they’ve really made superb bets, Warren Buffett suggests you should still be skeptical.

Let’s call it the “Lucky Monkey Problem.” In his 2016 letter to Berkshire Hathaway Inc. (BRK.A, BRK.B) shareholders, Buffett said that if 1,000 fund managers make a market prediction, at least one will likely be right nine years in a row.

“Of course,” he wrote, “1,000 monkeys would be just as likely to produce a seemingly all-wise prophet.” The difference? “The lucky monkey would not find people standing in line to invest with him.”

What are the lessons for investors here?

Lesson 1: Time Is the Ultimate Skill Detector

Buffett’s lucky monkey problem is a warning about confusing luck with skill in investing.

In Buffett’s example, fund managers, despite often owing their success to luck rather than skill, attract billions in assets as people line up to invest with them based on short-term track records that may be nothing more than chance.

Buffett has made this point repeatedly throughout his career. The real test of skill, he argues, is whether results can be repeated consistently over many years, across different market conditions, not a hot streak that could just as easily belong to a dart-throwing primate.

The data suggests Buffett may be on to something regarding fund managers. According to S&P Global, most actively managed large-cap funds have underperformed the S&P 500 index over time. As you can see in the chart above, in 2014 and 2021, more than 85% of these funds lagged just putting your money in an index fund. Even in their best recent year, 2022, almost half fell short.

Lesson 2: Process Matters More Than Outcomes

The best investors don’t follow a scattergun approach dictated by popular opinion or by following a few lucky gurus. They stick to a plan, aren’t steered by noise, and can explain why they believe in a certain investment based on the company’s fundamentals, not hype.

History shows that if you do your research, consider valuations, think long term, and diversify sensibly, you have a good chance of making money in the long run.

Meanwhile, if you buy what other people tell you to buy, chase the hype, and put all your eggs into one basket, your chances of coming out on top over the course of several decades are considerably lower.

Lesson 3: Beware of Survivorship Bias

Survivorship bias is the tendency to focus on winners while ignoring the failures that disappeared from view. We hear about the investors and funds who won, not the countless ones who blew up and quietly vanished.

This creates the false impression that success is common or easily repeatable. A key trait a good investor needs is skepticism.

Being easily led and overconfident is a recipe for disaster. As Buffett noted, the great majority of managers who attempt to outperform will fail—and “the probability is also very high that the person soliciting your funds will not be the exception.”

Lesson 4: Becoming the Patient Monkey

In the end, you can make the monkey work for you instead of against you.

“A very low-cost index is going to beat a majority of the amateur-managed money or professionally managed money,” Buffett has said. So, if money managers are often marketing their luck, not skill, and stock pickers touting their wins are doing much the same, what should an investor do?

In his 2020 shareholder letter, Buffett wrote that “a patient and levelheaded monkey, who constructs a portfolio by throwing 50 darts at a board listing all of the S&P 500, will—over time—enjoy dividends and capital gains, just as long as it never gets tempted to make changes.”

In other words, buy a low-cost index fund that invests in the market, don’t let hype lead you away from sticking with it over the long term, and you’ll likely beat most professionals, Buffett advises. In short, be the patient monkey.

The Bottom Line

Successful investing isn’t about trying to get rich quickly by following the tips of so-called experts. In most cases, it’s about minimizing costs and investing patiently and consistently across the entire market.

Buffett’s lucky monkey problem remains a powerful reminder: a few lucky wins are too common, skill is rare, and the best results usually come from patient, low-cost, and long-term investing.