Whenever the Berkshire Hathaway annual report goes public, it’s read over by financial analysts with a fine toothed comb. It makes sense. Many of those reading the report hope they can find some insight that can give them an edge in their own investing. The funny thing is, you really don’t have to look very hard to find the important investing advice that Buffett believes most people should follow. This is because he puts it out there for everyone to see as bright as day. The question is, will most people follow it?
Buffett’s Advice: Index Fund and Short Term Government Bonds
As part of the 49th Berkshire Hathaway annual report that came out earlier this month, Warren Buffett wrote that he has given instructions to his wife on what she should do with the money she inherits when he dies. One might think that the instruction might get quite complicated since she’ll be inheriting money from one of the richest men in the world. The truth is that the advice is actually quite simple. Warren Buffet want his wife to invest 90% of her inheritance into a low-cost S&P 500 index tracker. He also advised that she should invest the remaining 10% into short-term government bonds. That’s it. Nothing fancy, but still sound financial advice.
Studies have shown time and again that there are few fund managers who are able to outperform the S&P 500 over extended periods of time. With the knowledge that the vast majority of active fund managers will return less money than an S&P 500 index tracker fund while charging more in fees, the advice is really nothing more than common sense. This is the way that Buffett believes most people should invest. It’s how one of the best investors in the world wants his own wife to invest when he’s gone.
The problem for many with this advice is that it’s rather boring. There isn’t much excitement day to day when 90% of your money is in index funds with the other 10% in government bonds. It lacks any type of sexiness, at least in the short term. What it lacks in excitement today will be paid back during retirement when the amount of money in the retirement fund should create a great deal of excitement.
Does Buffett Practice What He Preaches?
No. He doesn’t.
The reality is that Buffett’s trading behavior and his public pronouncements don’t always match. While Buffett openly preaches buy and hold, his trading behavior has been far more diverse. During his early career, Buffett used arbitrage techniques, short-term trading, liquidations, rather than investing in index funds or using the buy and hold techniques that he became famous for with companies like Coca-Cola. In the latter stages of his career he was able to diversify his portfolio using fixed income arbitrage, currencies, commodity plays, and other techniques.
If you want more details on this, get a copy of James Altucher’s book: Trade Like Warren Buffett. The book walks you through the strategies that Warren Buffett uses to make money trading the equity and debt markets. Altucher’s book is probably also the most accurate and comprehensive work on Buffett’s trading career that you are likely to find anywhere. You should definitely give it a thorough read if you are serious about understanding how Buffett really made money.
Second, Buffett definitely didn’t get rich from following his own boring advice. Most of his career has been wrapped up in buying and owning cash rich companies – not holding index fund shares. If you want a detailed blueprint on how he did it, consider getting a copy of The Snowball: Warren Buffett and the Business of Life. It is an authoritative and comprehensive review of Buffett’s career – loaded with lessons for the average investor. Both books work well together to give you an excellent overview of what Buffett did to make his business successful.
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