Warren Buffett's Investment Strategy For Someone of Modest Means

Warren Buffett, Investment Advice

Warren Buffett is often asked for investment advice. This is no surprise as he is one of the richest people in the world and often thought of as the world's best investor. In his most recent letter to shareholders, he reiterates that he most often recommends a low cost S&P 500 index fund.

In fact, in 2006, Warren challenged any investment pro to pick five fund of hedge funds (essentially a fund that holds a group of hedge funds) and if they could beat a low cost Vanguard S&P 500 index fund over 10 years, they would win $500,000. More importantly, they would win against one of the investment greats and the publicity would likely earn a windfall of assets to their firm. However, it was quiet. Hedge funds charge notoriously high fees, often 2% of assets per year and 20% of profits and that creates a huge drag on performance. No one would stick their head out and show that their entire industry as an aggregate adds no value.

Finally, Ted Seides stepped up and picked his fund of funds. The bet is now nine-years-old, with one more to go and the S&P 500 compounded annual return is 7.1% and the hedge funds have delivered 2.2%. So, if you invested $1 million in the Vanguard S&P 500 index fund you would have gained $854,000 vs. $220,000 for the hedge funds. Not even close.

Warren Buffett does recognize that some people will beat the S&P, but he's only found 10 or so in his lifetime when they were early in their careers. So if one of the best investors in the world, who spends all day reading about investing and business, can only identify 10 great future investors, what makes you think you can find them on your bank's mutual fund list. Do you even know the name of the manager? Or just that you picked one that did well over the last 3-5 years?

So do yourself a favor, get rid of the expensive mutual funds, hedge funds and everything else. Get into index funds. Where? Well Warren Buffett just said in his letter "If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be Jack Bogle." Never heard of him? It's because he gave up being one of the richest people in the world to help us all out. He started Vanguard. It's one of the largest asset managers in the world and recommended by one of the richest men in the world. Seems like an easy choice.

 

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