Index Investing: Warren Buffet Approved

It goes without saying, Warren Buffet is a legendary investor. Even if you know nothing about investing, you know he's synonymous with success. A true household name.

His track record speaks for itself. From 1965-2018, he led Berkshire Hathaway to annualized returns of ~ 20%. In contrast, the S&P 500 had average annual returns of ~ 9% over this time. Beating the market by twofold is impressive, to do it for decades is unheard of.

How Does He Do It?

Buffet is a value investor. He spends a lot of time analyzing fundamentals, only investing in companies that meet his rigorous standards.

Should I Pick Stocks Like Warren?

No. Despite his success, Buffet is a huge advocate of index investing.

Why?

Fees, Fees, Fees

"A low-cost fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth."

Fees devour returns. Index ETFs cost a fraction of active funds. Ranging from 2-4 times cheaper. These savings add up and have a huge impact over time.

Stock Picking Is Hard

"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. A low-cost S&P 500 index fund will achieve this goal."

Even Buffet attests how difficult it is to pick winners. The data backs this. Time and time again, we see most active investors failing to beat the market.

Index Investing Makes Dumb Money Smart

"By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb."

Simply buying and holding an index fund can make you an above average investor, all while paying rock-bottom fees. What a deal!

Warren Buffet is a wise man. Known for his quotes as much as he is for his investing. His insights are thoughtful and backed by decades of experience and data. His praise for index investing speaks volumes.

Comments

The Art of Giving Feedback

Constructive feedback is an awkward affair. You don't want hurt feelings, but recognize the importance of honesty. You've tried the classic "hoping things will get better on its own" and unfortunately it hasn't played out. When giving feedback, here are a few things that I try to keep it mind. Start with empathy. Step into their shoes and understand their story. If you don't know, ask. Be genuinely curious. Feedback is a dynamic affair. Shared communication with a shared goal towards progress. Take the emotion out of it. Focus on the situation, not the person. Focusing on the person adds unnecessary weight to an already emotionally-bloated event. Be specific. Give clear examples. Vague feedback equals dismissed feedback. Doing above won't de-awkward things fully, but it will dampen it and increase the chance of better outcomes.

Bias For Clarity

Bias for action. Gets things done. Go-getter. Traits companies big and small look for. And for good reason, you're being hired to do things! However, action is a secondary step that often overshadows the primary step, direction. Clear direction is the foundation that enables our actions to takeoff. Without it, we're stuck in the mud. Striving for clarity is an underrated skill. Having the courage to ask ( seemingly ) obvious questions, and to check in, making sure we're all on the same page. "O bvious " questions are a low risk, high reward way to add value. At worst, you'll add confidence to our actions. At best, you discover a misalignment that saves us from a dead-end. The more people, the more clear we need to be. The bigger the initiative, the bigger the risk of reaching the finish line, only to realize expectations were off. Success is always uncertain. But we can be certain about what we want and what everyone's job is. Things that can be clea...

Negative Feedback, Positive Lessons

In the battle against plastic bags, a five-cent tax was shown to be much more successful at deterring usage than a five-cent credit for bringing your own bags. Carrots satisfy but sticks sting, and they sting hard. So we default to the less painful choice of avoiding loss. Loss aversion impacts the way we process information. A 2019 study invited participants to learn through a series of multiple choice questions. Each question only had two options to choose from. Whether guessing correctly or not, they would still learn the right answer. Despite the identical learning opportunity, participants were much more successful at recalling the answers they guessed correctly than those they got wrong. "You're right!" feels good. We savour the moment, analyzing every detail. "You're wrong!" stings. We want to quickly forget, dismiss, and move on. When we succumb to loss aversion, we miss opportunities to learn. Failure is part of the process. We'll experie...

Herman Ye

Search