Over the years, much has been made of the advice of iconic investor and billionaire Warren Buffett, including his penchant for promoting the idea that most investors should use index funds.
When one mentions Buffett’s promotion of low-cost investing, usually the pushback from active investors is immediate.
Certainly, they say, he can’t mean that nobody should be picking stocks! After all, he did very well at it over the years!
It’s a fair point, but utterly mistaken. Yes, Buffett is a stock picker. But he’s a rare bird indeed, among a handful of very keen minds who have managed to win at an essentially unwinnable game.
Would you get into the pool with Michael Phelps? Tackle the back nine with Tiger Woods? Play pickup ball with LeBron James? Probably not.
Nor should you attempt to do the kinds of things that Buffett does on behalf of his investors in Berkshire Hathaway
The risks are great and rewards few and far between, as he takes great pains to spell out.
Risk must be considered, not just return, Buffett argues. Here are five instances in the past where he makes the case for reducing risk by owning the stock market via index funds.
Most of these come from his past letters to shareholders, noted by year, except for one which happened to be in conversation with Vanguard Founder John Bogle, a man Buffett in 2016 called a “hero” to investors for his tireless work promoting low-cost investing.
1. High fees create low returns
“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.” (2016)
2. The goal of the amateur investor
“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…