Hi Guys,
"My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% 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."
That is a recent quote from Warren Buffett. Over many years he remains consistent in his investment recommendations. Here is a quote from his 1996 Shareholder Letter:
"Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals."
I recently discovered a fine set of investment videos from an outfit in England. They practice what Buffett has been saying for decades for most investors. The presentation material is not very sophisticated, especially for most of MFO participants, but it includes many brief segments from famous US researchers. It's all about sensible investing which is the name of the firm that produced the video. Your enjoyment will most likely be tied to your preference for active or passive investing strategies. Here is a Link to one of their 1 hour videos:
https://www.sensibleinvesting.tv/passive-investing-the-evidenceEnjoy. Since I do a mix of both actively and passively managed mutual funds, I did enjoy it. I am slowly moving more of my funds in the passive direction.
Best Regards.
Comments
BUT, when a legendary investor like Warren Buffett gives you that kind of advice one should be compelled to spend a little time finding out just why he says that.
Excerpt from article: Specifically, Buffett wants the trustee of his estate to put 10 percent of his wife's cash inheritance in short-term government bonds and 90 percent in a low-cost S&P index fund ... (Buffett) "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."
An extensive discussion ensued on MFO at that time soon after Buffet's instructions became public. (Unfortunately, I can't seem to get back as far as March 2014 in searching past threads or I'd link the discussion.) Central to the discussion, I believe, was whether Buffet's estate and wife's situation were in any way similar to that of Joe and Jane Doe. In other words, do the instructions to his trustees also represent prudent advice on how all of us should invest?
Is this the thread, from March 5, 2014, to which you refer?
http://www.mutualfundobserver.com/discuss/discussion/11836/warren-buffett-suggests-a-portfolio-of-90-s-p-500-index-fund-and-10-short-term-bonds
Everyone that invests will have to pave their own road to riches but I believe that Mr. Buffett's advice is a solid bed on which to apply the final layer. In my own plan I disregard the bond fund advice and substitute that portion with my SS account. My stock holdings are roughly 85% US (half & half S&P 500 and others) and 15% foreign. We should remember that Warren's advice was a general recommendation for most (not all) investors. I venture to guess that over 50% of folks who contribute to a 401k or similar have no idea what they own or why they own it.
I hope folks take a look at that thread from March 2014. (In particular, Ted hasn't aged a bit over those two and a half years!)
Thanks.
Wow!!! You folks have terrific memories. You remembered a rather modest MFO exchange about a Warren Buffett recommendation that was made over 2 years ago. That's remarkable; especially when contrasted against my many memory shortfalls.
I went to the internal referenced link and was relieved to discover that I did not participate in the exchange. If I had, that would have been doubly embarrassing.
The most interesting thing I learned from reading your historical posts was that our intrepid linkster Ted possess a walk on water capability. Only a few of us share that talent.
Memory plays many tricks on us, mostly impacting our behavior and decision making in a negative way. Abraham Lincoln captured a proper perspective when he said " No man has a good enough memory to be a successful liar."
Thank you all for contributing to this honest and friendly discussion.
Best Wishes.
Take the S&P Mid Cap growth index / ETF for example. The MDY ( S&P Mid Cap 400 growth ETF ) was launched when Buffet / BRK-A started to become noticed in the mainstream ( mid 1990's ). ( It appears that ) the Mid Cap index has specific, systematic selection criteria for management of the index. Reading literature ( shareholder letters, anecdotal evidence contained in books and articles ) on Buffet's methods seems to belie a somewhat idiosyncratic and haphazard process in position sizings and weightings, asset holding periods, and the occasional use of sophisticated "derivative" products ( this can be said for Icahn also ). If Buffet's "genius / greatness" has been reflected in BRK-A's share price, then a buy & hold of the "diversified index fund" ( Mid Cap 400 ) definitely has had an edge for a couple of decades and from different starting points. https://docs.google.com/document/d/1Kv2UtpBp7OIK56ZzrkthnV1PDRUA9AmGS6hAmr3Tl6A/edit?usp=sharing
Application of this simple quantitative tactical strategy for example, has produced further excess, risk adjusted returns vs. buy & hold https://docs.google.com/document/d/1WLB4hOP8P15O8b10_P4VgHuuBQHHke_c3XjwAjiFqio/edit?usp=sharing
As the management industry migrates towards "passive" indexing, perhaps gone is the discretionary and esoteric based management style that once reigned in the 20th century ?
- It could be that Buffett genuinely enjoys investing and is always looking for niches (i.e. mispricing) that he thinks may give him an edge or reduce the risk to his shareholders.
jstr says: "As the management industry migrates towards "passive" indexing, perhaps gone is the discretionary and esoteric based management style that once reigned in the 20th century ?"
- Perhaps the trend towards indexing will continue, even "snowball", until there comes the next major shock to the markets - something reminiscent of the 30s or '07-'09. I suspect funds whose managers had exercised caution, balance, hedging, and an aversion to popular trends will fare better during such a period than most indexes; and that subsequently, at some future point, many investors - especially the small retail ones - will again see value in "discretionary and esoteric based management style(s)."
- Question: Are there any other reasons to invest other than to make money? Umm ... Do we dine only for nourishment, or do we find other reasons to do so and other considerations to take into account?
S&P's "indexes" do not have "systematic selection criteria", at least the way I would use that phrase: "entirely rules-based and containing no judgment".
See, e.g. "What Is an Index" http://alo.mit.edu/wp-content/uploads/2015/10/index_5.pdf
Unlike other index providers such as Russell, Wilshire, etc., Standard and Poor's has a human index committee that applies judgment in selecting securities for index inclusion. Notable is its criterion for removal: "lack of representation". This potential for subjective tinkering was out in full force at the peak of the dot com bubble: https://www.thestreet.com/story/1305526/1/make-a-bundle-on-the-sps-rejects.html
More recently, S&P made rule changes not to improve how well its index represented the market or the index's investability, but to improve S&P's bottom line: http://fortune.com/2015/11/23/pfizer-dow-jones/
Systematic selection criteria? Yeah, right.
Thanks for your comments, especially those most recently made.
The active vs. passive management debate will remain a hot topic. While the overwhelming academic research concludes that passive is the winner on average and in the long haul, limited evidence suggests that active management can deliver superior returns and/or reduced risk over some periods. The secret sauce is to discover the right manager for the right timeframe.
That's not an easy task; what worked in the past need not work in the future. Fund manager Bill Miller is a great example. He outperformed his benchmark for 15 consecutive years and just a few years later scored in the bottom 1% of all active managers. Things change.
A successful active manager wins over some timeframe using a specific methodology that reflects his knowledge and his biases. Once again things like macroeconomic conditions change and the active manager is not flexible enough to either recognize the changes or to adjust his methods. That was Bill Miller.
If you favor active fund management, you must actively evaluate active managers. That's tough work, but necessary to capture the small percentage of fund managers who do beat their benchmarks. It's a changing group since persistence is not one of their basic characteristics.
Benchmarks are needed to challenge and test the quality of active fund management. For lhose funds that specialize in large companies, the S&P 500 Index seems to provide a respectable, albeit an imperfect measure.
I did know that a committee controlled the firms represented by the Index, and that a few changes were made annually based on rules and judgments. I am not aware of the weightings given to the formulaic portion of the decision process and the heuristic portion.
I am not adverse to having a human heuristic segment. For something as uncertain as company assessment and the stock markets, equations alone will never be perfect. But too much emotional heuristics can ruin a useful market tool. The balance is a difficult target, but the S&P 500 committee seems to have done an acceptable job. By rule, they must maintain a proper weighting in the 11 major sector categories. Nothing is ever perfect in the marketplace; a satisficing strategy must do.
Best Wishes.
Instead, I believe investors should think hard about where they think active management adds value, IMO Int'l SC, EM, Alts, and then select the managers they believe fit their portfolio(s) best and will generate the most alpha. Do your homework on these managers and understand their philosophies/processes and any biases they may have so you are equipped to tolerate periods of relative underperformance, in order to reap the benefits of the longer-term.