One of Warren Buffett’s most underrated observations about markets comes uncomfortably close to the truth. While analyzing how stock prices move relative to intrinsic value, he noted in his 1996 letter to shareholders that when stocks move among investors, “generally, the sophisticated have the advantage over the innocent in this game.” It was not a moral judgment. It was a warning.
As then-CEO of Berkshire Hathaway (BRK.B) (BRK.A), Buffett was describing what happens when market prices diverge from business reality. When a stock temporarily outperforms or underperforms the underlying company, someone profits from that gap. Profits don’t come out of nowhere; They come from the other side of the trade. And over time, people with better information, better incentives, and better emotional control tend to be the ones who make those gains.
This is where Buffett’s view on investing differs markedly from the popular narrative. Markets are often presented as neutral arenas where everyone has the same opportunities. In practice, markets reward preparation and punish naivety. Professionals understand structure, liquidity, psychology and time horizons. Many individual investors don’t and tend to arrive at the worst possible times, driven by fear or emotion rather than value.
Buffett watched this dynamic play out repeatedly. When stocks are expensive and optimism is high, inexperienced investors rush in, believing that recent performance is proof of future security. When prices fall and uncertainty increases, these weaker hands run, locking in losses. Meanwhile, more sophisticated investors often do the opposite: they buy quietly when negative retail emotion has overtaken reason.
What makes this observation so disturbing is that it doesn’t accuse anyone of cheating. The “edge” Buffett refers to is not necessarily insider trading or manipulation. It’s patience, discipline and a clear understanding of what a company is really worth. That advantage compounds as powerfully as capital does.
Buffett’s response was not to try to outdo the professionals at their own game. Instead, he structured Berkshire Hathaway to minimize trading entirely. By encouraging long-term ownership and discouraging speculation, it reduced opportunities for shareholders to get on someone else’s wrong side.