Warren Buffett’s Best Investment Advice Also Is Simple to Understand
There are hundreds of books filled on how to invest your money in the stock market, and an untold number of websites, blogs and articles right at your fingertips with a computer or even just a smartphone.
BUFFETT: “You didn’t have to know accounting, you just had to believe in America. And you didn’t have to pick the right stock, you just picked America. That isn’t a tailwind. It’s more like a hurricane.”
But, according to MarketWatch’s Mitch Tuchman, a recent column in The Washington Post by Tom Heath highlighting the words of Warren Buffett in his latest letter to shareholders is by far the best advice — and the simplest to understand.
In his letter, Buffett lays out his case for what he calls “the American tailwind,” or the idea that investors aren’t buying companies when they invest, but rather an idea; the idea that American prosperity is driven by our dedication to and belief in the American idea.
Over the course of roughly three human lifetimes, Buffett argues, the United States grew from just four million people to the most powerful nation on earth. That inexorable rise was punctuated by a revolution, a Civil War, the Great Depression and two world wars, yet the American idea persevered.
“Leaving aside congenital pessimists, Americans believed that their children and generations beyond would live far better lives than they themselves had led,” Buffett wrote. “The nation’s citizens understood, of course, that the road ahead would not be a smooth ride. It never had been.”
Our economic growth since 1942, the year of Buffett’s first-ever investment, has been “breathtaking,” he argues.
Buffett’s first investment, of $114.75, was in a single stock. If he had invested instead in a no-fee index fund of the S&P 500 SPX, +1.00% that small sum would have grown to $606,811 by the end of January 2019. (Of course, index funds did not exist until many years later.)
A $1 million investment in a tax-free investment, such as a college endowment, would have grown into $5.3 billion, Buffett continued, for a gain of 5,288 for 1.
Surely, you might be thinking, someone out there, some sharp stock operator or person “in the know” did better. And you would be wrong.
“Let me add one additional calculation that I believe will shock you,” Buffett wrote.
“If that hypothetical institution had paid only 1% of assets annually to investment managers and consultants, its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.”
As Heath says, it’s precisely this misplaced faith in stock picking that leads so many of us to disappointment when it comes to investing.
“Investing is about keeping life simple. Riding the wind,” Heath wrote. “Put your money in inexpensive index funds that mirror the U.S. economy. Let the American Tailwind do the work.”
As Buffett elaborated on CNBC, owning a low-cost index fund of the whole stock market is the answer for the vast majority of long-term investors.
“You didn’t have to know accounting, you just had to believe in America. And you didn’t have to pick the right stock, you just picked America,” Buffett said. “That isn’t a tailwind. It’s more like a hurricane. American business has done incredibly well, and America’s done incredibly well.”
America is exceptional in this respect, continued the iconic billionaire, and has been from its very start.
“We’ve got something that works,” Buffett said. It “wasn’t that we were working harder. Wasn’t that we were smarter. But we had a framework that unleashed human potential.”
Before you start down the path of “things have changed,” consider this: Buffett has told his own lawyers that, upon his passing, his own money left to heirs should be invested in low-cost index funds.
The tailwind continues.