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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Alex C
Alex C
7 years ago

Warren Buffet is a genius. These are good practices, that if done over time consistently will bring great results.

I like the third piece of advice of not timing the market because it seems like every one does that. The idea to make money is to buy low and sell high, but most people buy in only when the market is good, so the purchase at high prices usually, then they sell low because they become afraid of loosing all of their money. So the average person buys high and sells low and never becomes very wealthy

@WiseBanyan
@WiseBanyan
6 years ago
Reply to  Alex C

Also big fan of not timing the market. To follow-up on your point about buying low and selling high, another good practice (in addition to the long-term strategy of low-cost indexing) is rebalancing. When an investor rebalances, he or she actually capitalizes on the benefit of buying low and selling high.

-Vicki

Justin
Justin
6 years ago
Reply to  @WiseBanyan

Hi, I have to say that I disagree with that, and so would Warren Buffett. To say rebalancing means you plan to sell some stock when the markets are high – this again is just trying to time the markets. Just hold the stock/index. Keep buying into indexes throughout your life, slowly but surely invest into indexes. If there is a sudden crash like in late 2008, then by all means put more than usual into an index.. but a crash is a rare occasion when you can guarantee equities are undervalued. People start selling everything, and confidence becomes ridiculously… Read more »

Lucas
Lucas
7 years ago

Warren doesn’t have to follow his own advice on index funds becuase he has the power to manipulate prices to his advantage. If he was buying stocks/companies at market price he would probably be loosing out to index funds as well. Did you watch what kind of deals he got during the recent crash becuase he was willing to buy/invest when others weren’t? He bought large quantities of stock in several companies (at close to market price), but also go a guarenteed dividend of greater than 10% in some cases. For example here is a quote regarding his GE deal… Read more »

mike
mike
7 years ago

There are only a small percentage of people who have and will have the success of a Warren Buffet, only the smallest fraction of a percent, thus the majority of us will not be able to replicate him. That being said, the info above has been repeated a MILLION times, even by MR. B along with other info that we hear time and time again. Most people are successful by working hard, living below their means, learning about investments and they have a little bit of luck or perhaps alot. Oh and there is also a fair amount of quid… Read more »

Ely
Ely
7 years ago
Reply to  mike

What Buffet does isn’t ‘timing’ though. He’s buying on sale with a long view. He doesn’t just scoop up everything that’s cheap; he buys companies that may be suffering a temporary setback or challenge, that he in his experience has confidence they will overcome. It’s that knowledge and experience that most of us lack.

Ely
Ely
7 years ago
Reply to  mike

What Buffett does isn’t ‘timing’ though. He’s buying on sale with a long view. He doesn’t just scoop up everything that’s cheap; he buys companies that may be suffering a temporary setback or challenge, that he in his experience has confidence they will overcome. It’s that knowledge and experience that most of us lack.

Matt Becker
Matt Becker
7 years ago

Great advice. It always cracks me up when people point to Warren Buffet as an example of active investing that works, as if they can replicate it. I mean, when I look at Lebron James, my immediate thought is certainly not “Hey! I could do that too!”

Active managers lose to index funds time and time again. And individual investors trying to pick active funds actually do even worse. Patient, consistent index fund investing is a sure way to above-average performance.

CM
CM
7 years ago
Reply to  Matt Becker

Um…if you only do index investing you will by definition never beat the averages, simply because the index fund will mirror the performance of the index minus the costs…you will always perform worse than the index mathematically.

Ross Williams
Ross Williams
7 years ago
Reply to  CM

“Um…if you only do index investing you will by definition never beat the averages”

That isn’t actually true. It depends on when you invest, just like it does with any other investment.

Moreover, while you won’t do better than the average in the index, you can easily do better than the average active investor. That’s because the average active investor does worse than the market.

CM
CM
7 years ago
Reply to  Ross Williams

“It depends on when you invest…”

So…to beat the average you have to try and time the market?

I do agree that you will beat nearly every active investor and that those few actives who do beat the index are just lucky, not skilled, and unlikely to beat in the next timeframe.

Ross Williams
Ross Williams
7 years ago
Reply to  Ross Williams

“So…to beat the average you have to try and time the market?”

Essentially, yes. At least the markets you are investing in. You beat the market by buying when prices are low and selling when prices are high. That boils down to timing the market.

Ross Williams
Ross Williams
7 years ago

Financial gurus are successful because, like all media including this blog, they confirm some people’s beliefs. In essence, they confirm how smart those who share their beliefs are. Its not really surprising those same people don’t blame the guru when their mutual belief turns out to be wrong. Successful money managers don’t manage money, they manage people. They are in sales. You can see this when they start talking about “risk tolerance” as a psychological problem. How much risk are you “comfortable” with. Real “risk tolerance” is determined by your objective investment goals, not by some personality trait. There are… Read more »

TB at BlueCollarWorkman
TB at BlueCollarWorkman
7 years ago

Market forecasters, ha! I don’t listen to that junk either. Just pick your stocks based on companies you like and use, and then wait. Wait until you retire.

Weather forecasters also keep their jobs because we feel like we need someone telling us what it’s gonna be like. If it rains when they say it’s gonna be sunny one more time…

Jake Erickson
Jake Erickson
7 years ago

This is great, I love all three of the points. I know many people may disagree with a few of the points, but how can you disagree with the success Warren has had with investing. I know that I’m definitely not as financially savvy as Warren, so I’ll listen to what he has to say.

My Financial Independence Journey
My Financial Independence Journey
7 years ago

I’m very much with Buffet. I ignore the talking heads and I don’t try to time the market.

I don’t invest with index funds, instead I purchase individual securities. But again, I follow Buffet, I try to find great companies trading at low valuations and buy them. Buying individual stocks takes some amount of time and effort. If this isn’t for you, then index funds make the most sense.

Janette
Janette
7 years ago

Buffet’s stock IS an index fund.

John S @ Frugal Rules
John S @ Frugal Rules
7 years ago

Buffett certainly is a genius. I love watching people who think they can do the same as him yet lack the patience to stick with it. One of the many things that sets him apart is that he does not let the fear dictate him. He sticks with his plan for years and decades (just like you said). It may not be as “sexy”, but slow and steady wins the race.

steve
steve
7 years ago

During a recession, the Warren Buffetts of the world look at the economic downturn as “stocks are on sale”. Now that things have rebounded, the harvest of the seeds are bountiful in either increased stock price or hefty dividends.

William Cowie
William Cowie
7 years ago

We don’t need to succeed at the level Warren Buffett does. The standard is simply: can I do well enough for me?

Mr. Buffett became successful when he was small and unknown. And he became successful by spending the time looking at individual businesses which happened to be trading on the stock market.

Anybody putting in that time has a good chance to be successful. His advice to stick with index funds is aimed at folks who don’t have the time or inclination to put in the effort required to succeed with individual stocks…

krantcents
krantcents
7 years ago

Warren Buffet is a value investor! He buys companies that are undervalued based on his criteria or he expects it to grow because it is a basic industry. He stays away from any of the sexy tech companies or any other companies he does not understand. An index fund sticks with that philosophy.

Jenny @ Frugal Guru Guide
Jenny @ Frugal Guru Guide
7 years ago

Berkshire Hathaway also has the power to influence policy with the companies they invest in, so after identifying an undervalued stock, they can buy up a big chunk of the company and then make sure whatever stupid thing management did to lose investor confidence doesn’t end up eroding the real value of the company.

ETFs generally outperform value investing for individuals without this power.

Melanie Egerton
Melanie Egerton
7 years ago

When Warren speaks I listen…The man is an absolute genius.

With the patience of a saint!

Dan
Dan
7 years ago

What about actually investing with Buffet by buying BRK.B?

Brian
Brian
7 years ago
Reply to  Dan

Well, one problem is that Buffett is in his eighties. For a long-term investor who is significantly younger, the question is: Can anyone else replicate his success once he (and Charles Munger) is no longer running the company? Idex funds, at least those that invest in broad market indexes (like the S&P 500) work more of less the same no matter whose name is on the fund`s stationary, with fees being the primary element to compare.

Alex
Alex
7 years ago

Great article reviewing some of Buffett’s themes in investing. Unfortunately, including Buffett in the title of my blog posts don’t seem as effective just yet.

Alex
Alex
7 years ago

Great article reviewing some of Buffett’s themes in investing. Unfortunately, including Buffett in the title of my blog posts doesn’t seem as effective just yet.

rosarugosa
rosarugosa
7 years ago

Including Robert Brokamp’s name on the author line always grabs my attention!

Matt at Healthy N' Wealthy
Matt at Healthy N' Wealthy
7 years ago

Great post, Robert. I love Buffett’s investment ideas and writings. I commend his personal frugality, and I look up to him. That being said, he is a self-righteous crony capitalist who doesn’t understand simple economics.

Definitely study Buffett: his ideas make the most sense, and are probably easiest for common folk to follow. But, I think we all need to figure out our own way of investing. Buffett often, somewhat arrogantly, voices his disdain for anything other than value investing. However, if you can make money in the market, who cares how you do it!

KSR
KSR
7 years ago

OMG, thank you for saying exactly this! One million thumbs up! He has made his empire off of turning paper. Bad paper into good paper. I can’t tolerate the Jesus complex with this guy. He is shrewd and knows exactly what he’s doing with plenty of unethical dealings and inside info. If you want to know where the economy is going, study his example–don’t take for word his advice. I can only assume his latest predictions are of unimaginable inflation (to us 60’s-70’s kids) and to invest the opposite. Regardless, he’s not uncle Buffett. He knows things. Because they let… Read more »

Dave
Dave
7 years ago

Warren Buffett is patient and makes his purchases when the time is right – more correctly said is when the right price occurs.

Patient is one significant key that makes Warren the richest man who makes his money through investing in the stock market.

Great Article!!

Mike@WeOnlyDoThisOnce
7 years ago

Great recap! Buffett, from what I’ve read about him, also never dwells on past mistakes and understands the significance of independent events; that is, he won’t hesitate to take a risk if his last didn’t pan out.

@debtblag
@debtblag
7 years ago

Obviously Warren Buffet knows way more about money than I do…

But he also has access to things that I don’t and his goals are way different from mine. It’s right that we shouldn’t have a lot in common when it comes to our investing styles.

Stock Shastra
Stock Shastra
6 years ago

Yes, I agree to what you have said at the beginning of this article. Not only articles but also Tweets, Facebook posts and a couple of books that have Warren Buffett’s name on it have become the bestseller books that have got the attention of many readers.

Michael F
Michael F
6 years ago

I agree with Lucas. Buffet is now at a place in the investment world where his buys are self fulfilling. If he can make 5-10% per trade on every trade his is a genius. His picks will move on the news alone that he is in, therefore he does it effortlessly. No science there.

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