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Buffett: 99% Of Investors Should Buy Index Funds

|Includes: Berkshire Hathaway A (BRK.A), SPY

Warren Buffett, the CEO of Berkshire Hathaway (BRK.A) is our generation's Benjamin Franklin, a humble billionaire full of great advice,  quips and invaluable insights.   Last Monday, he turned 80 years old.

In honor of his birthday, we’ve pulled together some information that will surprise you in terms of Buffett’s advice to 99% of all investors.  To paraphrase Warren, most investors should "do as I say, not as I do."  The world's greatest investor warns us against trying to imitate his stock picking abilities.  His unwavering advice for years has been to buy index funds because:  a) very few people have it in their DNA to be a great investor, and b) those who charge you for their investment expertise can rarely outperform the market due to their onerous fees.  

To bring home his advice we've pulled together a rare 8 minute Buffett video, evidence a $1 million bet he made, and a fable that he wrote.

1.  In a video lecture, Buffett explains that 99% of all investors should do what we at MarketRiders suggest.  Warren Buffett spoke to a group of students at the University of Florida and answered questions for ninety minutes about his investment philosophy.   Fast forward to the 1:15 minute mark on this great video.

"If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than world, then I believe in extreme diversification. I believe that 98 or 99 percent - maybe more than 99 percent - of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs. All they're going to do is own a part of America. They've made a decision that owning a part of America is worthwhile. I don't quarrel with that at all - that is the way they should approach it."

2.  In his 2005 and 2006 annual reports Buffett's imaginary and hilarious fable of the Gotrocks Family parodies the insanity of paying fees to professional investment advisers. Read excerpts from Berkshire Hathaway's 2005 and 2006 annual reports where Buffett describes what happens to the imaginary Gotrocks family when they begin taking help from Wall Street.

 "...imagine for a moment that all American corporations are, and always will be, owned by a single family. We'll call them the Gotrocks... In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.  But let's now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others....  The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend, and in a wide variety of ways, they urge it on."

3.  Then read about Buffett's bet with a leading hedge fund.  Buffett bet Protégé partners, a fund of hedge funds, $1,000,000 that over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 (SPY) will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.  Read about the bet and especially the comments.

Just because you can pick up a golf club doesn't mean you should bet all your savings on your getting on the PGA tour.  And just because you (or someone in a suit at an investment management firm) can place a trade at an online broker, doesn't mean you can pick winning stocks or mutual funds.

Do as I say, not as I do.  Thank you Warren! 

Disclosure: No positions