It is great to see that Lifetime and supreme investor Mr Warren Buffett are on the same wavelength!
The Oracle of Omaha and us here in Barnsley, South Yorkshire are both supporters of Vanguard.
Mr Buffett, 83, is the chairman of investing conglomerate Berkshire Hathaway, which has announced a record profit last year.
And in his annual letter to shareholders, Buffett stated the following:
“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. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organisations over the ten years following the closure 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.”
Mr Buffet goes on to say: “Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.
“I have good news for these non-professionals: the typical investor doesn’t need this skill. In aggregate, [American] business has done wonderfully well over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 320th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot.
“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 aschieve this goal.
“That’s the ‘what’ of investing for the non-professional. The ‘when’ is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.
“If ‘investors’ frenetically bought and sold farmland to each other -for example – neither the yields nor prices of their crops would be increased. The only consequence of such behaviour would be decreases in the overall earnings realised by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.
“Ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.”