Everyone’s still digesting Warren Buffett’s brand new letter to Berkshire Hathaway shareholders.
“This year, he shares some news that even you, the poor average bastard, can use,” wrote Gawker’s Hamilton Nolan.
That blunt language may seem aggressive, but it may actually be exactly what readers need.
In a post titled “Warren Buffett on How to Invest Better Than Warren Buffett,” Nolan points to a quote that might surprise investors of Berkshire Hathaway. From Buffett:
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. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organisations over the 10 years following the closing of my estate.) 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.
Buffett effectively argues that it’s wiser to invest in a boring index fund than it is to invest with people who try to beat the market. Note, Buffett’s Berkshire Hathaway tries to beat the market.
It’s appropriate that Buffett points to Vanguard, the mutual fund company where Jack Bogle made index funds famous.
In a piece for the January/February issue of the Financial Analysts Journal, Bogle made a devastating case for passive investing (i.e. investing in an index fund). He argues that even if the active fund manager is able to match the performance of an index fund tracking something like the S&P 500, the investor would still get crushed by fees.
In his study, over a 40-year period the passive fund investor would pocket an average annual return of 6.6% versus the active fund manager who would pocket just 3.9% (see chart above).
“In the short term, the impact of costs may appear modest, but over the long run, investment costs become immensely damaging to an investor’s standard of living,” wrote Bogle. “Think long term! For those who are investing for their retirement and for their life- times, understanding the cost issue is vital to success in investing.”
In Nolan’s words: “There you have it: you, the average idiot, can, with a simple online account, construct a low-cost portfolio that Warren Buffett himself says will beat what worthless expensive money managers in nice suits can likely get you. Do it, why not?”