I have had similar discussions with friends who invested their money in single stocks by very few companies (instead of getting, say, ETF shares) and my POV has always been this:
1. You cannot beat the market (i.e. ETFs) for two reasons: A) The market consists mostly of institutional investors. Institutional investors spend an enormous amount of time and money on making sure that they come out on top. B) The fact that institutional investors spend so much time and money on evaluating stocks means that all possible information about a company, i.e. all future expectations about the company and all risks have already been priced in and the market is efficient (in the economic sense). In particular, the future stock price development is by definition unpredictable and mostly random because it will be based on future information that does not exist yet.
2. As a corollary of 1), you get profits not for knowing a company well and assessing their valuation accurately (all this has already been priced in at the time you buy the shares!), you reap profits for enduring risk. The higher the risk, the higher the potential profits (or the loss).
3. Sure, arbitrage exists. But again, who is going to be more likely to discover opportunities for arbitrage? An institutional investor or a stay-at-home mom?
1. You cannot beat the market (i.e. ETFs) for two reasons: A) The market consists mostly of institutional investors. Institutional investors spend an enormous amount of time and money on making sure that they come out on top. B) The fact that institutional investors spend so much time and money on evaluating stocks means that all possible information about a company, i.e. all future expectations about the company and all risks have already been priced in and the market is efficient (in the economic sense). In particular, the future stock price development is by definition unpredictable and mostly random because it will be based on future information that does not exist yet.
2. As a corollary of 1), you get profits not for knowing a company well and assessing their valuation accurately (all this has already been priced in at the time you buy the shares!), you reap profits for enduring risk. The higher the risk, the higher the potential profits (or the loss).
3. Sure, arbitrage exists. But again, who is going to be more likely to discover opportunities for arbitrage? An institutional investor or a stay-at-home mom?