For the past 49 years, Warren Buffett has been one of the world’s most successful investors. However, over the last four of five years, I’ve bested his record. Even Buffett admits that he would have done better with a plain, old index fund. That’s what I did.
For those of you not familiar with index funds, they are mutual funds – a basket of stocks or bonds – that emulate a common index like the Dow Jones Industrial Average or the Standard & Poor’s 500 Index. In fact, Buffett’s company Berkshire Hathaway measures its success against the S&P 500. Over the past five years, they have only beaten the S&P in one year (2011) and that was only by 2.6 percent.
According to Salil Mehta, an independent statistician with deep experience in Washington and Wall Street, as quoted in the New York Times: “It shows how amazingly difficult it is to keep beating the market, even for a master like Warren Buffett. And it suggests that just about everybody else should just use index funds and not even think about trying to beat the market.”
Even Buffett believes in index funds. The 83-year old, in instructions for money that he is bequeathing in a trust for his wife, writes: “Put 10 percent of the cash in short-term government bonds and 90 percent 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.”
Let’s also note that Buffet makes money just because he’s Buffet. He has teams of analysts, resources and experience. Because of his financial power, he can make deals that nobody else can such as purchasing high-value companies like BNSF Railway, the second-largest freight railroad network in North America, and have its earnings sink to Berkshire’s bottom line. In fact, just because of the Buffett name, buying BNSF caused the stock to rise.
As I’ve noted in previous articles, 20 percent of money managers – people who manage mutual funds – cannot beat the indexes and that’s just on particular years. Over the long term, it can’t be done. Buffett is an anomaly. Mehta adds: “True investing skill [like Buffett] is so rare that the rest of us shouldn’t even try to emulate those who have it… we probably shouldn’t bother trying to hire the few outperformers to invest our money. Why? Because we aren’t likely to be able to identify them. Their talents aren’t always on public display, and there may be only a few thousand of them in the entire United States.”
Index Funds. Got it?
A former Washington correspondent for Business Week magazine, Larry Kahaner is the author of 15 books, including the best-selling Competitive Intelligence, a Book-of-the-Month selection that has been translated into six languages. He has also written Values Prosperity and the Talmud; Business Lessons from the Ancient Rabbis, The Quotations of Chairman Greenspan and AK-47; the Weapon that Changed the Face of War. Full bio.
His in-person, interactive, multimedia presentation titled Fiscal Fitness Boot Camp is available to colleges, universities and companies. You can email him directly at Larry Kahaner.
He is represented by Wolfman Productions, Inc.