Invest like Warren Buffett… but not really

If you want people to read your investing-related post or book, you’ll increase your chances by mentioning Warren Buffett in your title. After all, I just did it — and it might be why you chose to read this. Every financial media company does it, including us at The Motley Fool.

His investing skills while the chairman and CEO of Berkshire Hathaway have made him the fourth-richest man in the world. Most of the articles and books about him attempt to dissect his investing strategies and explain how you can use them to identify your own winning stocks. So it was a bit surprising when Larry Swedroe wrote Think, Act, and Invest Like Warren Buffett. He’s the director of research for the BAM Alliance of independent financial advisers, the author of several books, and a blogger on CBS Marketwatch. He also thinks that picking individual stocks — as opposed to investing in index funds — is a really bad idea.

I’ve chatted several times with Larry over the years, because he’s as smart as they come on the topics of asset allocation and financial planning. Recently, we had a conversation about why he would write a book singing the praises of the world’s most famous stock picker. Of course, that whole “increase sales by including Buffett in your headline” thing probably had something to do with it. But it’s not just a gimmick; Larry has three main arguments for why the index investor should still listen to the Oracle of Omaha, and he uses actual quotes from Buffett to back them up. And it starts with…

1. Warren Buffett recommends index funds

It may not be widely known, but Buffett is actually a fan of index funds. Here’s what he wrote in his 1996 annual letter:

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expense) delivered by the great majority of investment professionals. Seriously, costs matter.”

Buffett’s a smart fellow, and he knows his history and his statistics; both establish that it’s pretty darn hard (though not impossible) to outperform an index fund over the long term. Obviously, he doesn’t think this applies to him — he still keeps picking individual stocks (or buying companies outright). But he recognizes the great value of the index fund. The same goes for us at The Motley Fool. My colleagues devote a great deal of time and energy to finding great stocks. But we also have a room named after John Bogle, the founder of the Vanguard family of mutual funds and one of the primary progenitors of the index fund. (Next to the entrance to our Bogle room, we have a picture of Mr. Bogle wearing a Motley Fool cap during one of his visits to our office. It’s pretty cool.)

2. Warren Buffett ignores market forecasts

Wade into the waters of the ever-flowing financial media, and you’ll see an endless flotilla of gurus offering their assessments of where the market is headed. Buffett thinks you should pay them no heed:

“We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie [Munger, vice chairman of Berkshire Hathaway] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

In case you need some stats to back that up, CXO Advisory Group analyzed the predictions of 68 “experts” from 2005 to 2012. As a group, they were right less than half the time. You would have been better off flipping a coin than listening to these people.

During our most recent discussion, I asked Larry Swedroe why these people still have jobs. He had a few reasons, but one in particular stood out: “I have come to the conclusion, after my long years of experience both as an adviser to some of the largest corporations in the world on managing financial risk and as adviser to individuals and endowments, that there’s an all-too-human need for us to believe that there’s somebody out there who can protect us from bad things.” I think he’s on to something. Unfortunately, market predictions just create — rather than offer protection from — bad things.

3. Warren Buffett doesn’t try to time the market

You won’t see Berkshire Hathaway buying and selling its stocks or businesses too often. Once a company joins the Berkshire family, it’ll likely be in there for quite a while — decades probably. Here’s what Buffett said about it:

“Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.”

My very first post on Get Rich Slowly was about attending the 2009 Berkshire Hathaway annual meeting. It happened in May, just two months after the stock market hit bottom after dropping more than 50 percent. It was a dang scary time.

During that annual meeting — and at just about every annual meeting over the past several years — the topic of Buffett’s and Munger’s successors came up. After all, Buffett is 82 and Munger is 89. They didn’t name names, but they have some people in mind. However, it won’t be someone who tries to move in and out of the stock market. Here’s what they said:

Munger: I don’t think we’d want an investment manager who would want to go to cash based on macro factors. We think it’s impossible.

Buffett: In fact, we’d leave out someone who thought he could do that.

The important three questions

The main argument that Larry makes in his latest books is this: If you agree that Buffett is one of the greatest investors of all time, then take his advice. And the next time you’re inclined to act according to some expert’s forecast market forecast, Larry has three questions you should ask yourself:

  • Is Warren Buffett acting on this expert’s opinion?
  • If he isn’t, should I be doing so?
  • What do I know about the value of this forecast that Buffett and the market in general doesn’t?

As Larry told me, If someone has already told you that they think Buffett’s the greatest investor, it’s hard for them to say that they should do the opposite of what he’s advising them.”

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