America’s greatest stock picker says “index”

Print Friendly

OSBON_017Warren Buffett’s annual shareholder letter – always anxiously awaited by shareholders and others – was published last Saturday. As arguably the greatest stockpicker in history, (Berkshire Hathaway book value has compounded at about 20 percent annually since 1965) why does Mr. Buffett use the letter to recommend that investors take the exact opposite approach via indexing? Buffett-1

We can always count on the Buffett letter for its generous helpings of personal humility, long-term perspective and sage advice. On page 20 that advice turns directly to indexing, the benefits it provides for individual investors, and how it fits into his own financial plan.

It’s best to quote Mr. Buffett directly, since he says it best.

Warren on the past
In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot.

Warren on the future
The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. 

Warren’s investment formula for success
A low-cost S&P 500 index fund will achieve this goal.  The “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.

Warren’s own indexing plan
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. … My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.

There you have it.  Warren Buffett doesn’t suggest we try to find stocks that outperform the market. He doesn’t even suggest we buy Bershire Hathaway shares to benefit from his team’s phenomenal investment prowess. He simply suggests we get on the mighty train of capitalism with a diverse, low cost index. He seems to feel that if it’s good enough for his wife, it’s good enough for individual investors nationwide.

We agree completely.

Want to know more?
Give us a call at 617-217-2772 – we’d love to hear what’s on your mind


This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.

Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.

Past performance is not indicative of future results.  Investment in securities, including mutual funds and ETFs, may result in loss of income and/or principal.

An investment cannot be made directly in an index.


0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!