One of Warren Buffett’s most understated observations about markets cuts uncomfortably close to the truth. While discussing how stock prices move relative to intrinsic value, he noted in his 1996 shareholders' letter that when shares trade back and forth between investors, “generally, the sophisticated have an edge over the innocents in this game.” It wasn’t 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 drift away from business reality. When a stock temporarily overperforms or underperforms the underlying company, someone benefits from that gap. The gains don’t appear out of thin air; they come from the other side of the trade. And over time, the people with better information, better incentives, and better emotional control tend to be the ones collecting those gains.
This is where Buffett’s view of investing diverges sharply from the popular narrative. Markets are often portrayed as neutral arenas where everyone has an equal shot. In practice, markets reward preparation and punish naivety. Professionals understand structure, liquidity, psychology, and time horizons. Many individual investors don’t, and they tend to arrive at the worst possible moments, driven by fear or excitement rather than value.
Buffett watched this dynamic play out repeatedly. When stocks are expensive and optimism is high, inexperienced investors rush in, believing recent performance is proof of future safety. When prices fall and uncertainty rises, these weaker hands rush out, locking in losses. The more sophisticated investors, meanwhile, are often doing the opposite, quietly buying when retail’s negative emotion has overwhelmed reason.
What makes this observation so unsettling is that it doesn’t accuse anyone of cheating. The “edge” Buffett referred to isn’t necessarily inside information or manipulation. It’s patience, discipline, and a clear understanding of what a business is actually worth. That edge compounds just as powerfully as capital does.
Buffett’s response wasn’t to try to out-trade the professionals at their own game. Instead, he structured Berkshire Hathaway to minimize trading altogether. By encouraging long-term ownership and discouraging speculation, he reduced the opportunities for shareholders to be on the wrong side of someone else’s edge.
The quote also explains why Buffett was so hostile to high-commission products and heavily marketed investment vehicles. Those structures thrive on turnover, and turnover creates repeated chances for the uninformed to lose ground to the informed. Over time, that transfer of value becomes inevitable.
Buffett’s message wasn’t that markets are unfair. Instead, it was that markets are unforgiving. If you play a short-term game without understanding the rules, you’re likely to subsidize someone who does. The safest way to avoid that fate is not to trade more cleverly, but to trade less frequently and think more clearly.
In the end, Buffett believed the best defense against being the “innocent” in the game was simplicity. Understand what you own. Know why you own it. Hold it long enough that price fluctuations stop mattering. Do that, and the edge quietly shifts back in your favor.
On the date of publication, Caleb Naysmith did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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