Do you follow Warren Buffett? Then buy index mutual funds
I was browsing through Warren Buffett’s Chairman’s Letter, in the latest Berkshire Hathaway annual report. He talked about how he and his partner, Charlie Munger, try to suss out a business’s likely future earnings. If you’re trying to follow his method, however, he doubts you can do it unless you’ve made a study of business prospects a priority in your life.
But don’t be discouraged, he writes. “The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly in unpredictable fits and starts). . . . 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 to do well. A low-cost S&P index fund will achieve this goal.”
What more, Buffet writes that he has put his money where his mouth is. “My advice to the trustee [of the money he's leaving to his wife] could not be more simple. Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. (I suggest Vanguard’s). I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”
Are you a BuffetHead, always trying to pick value stock on his advice? Give it up! Pick an index fund instead.