Warren Buffett: The Wealthiest Index Investor?

This article was written with Jim Cahn, the Chief Investment Officer at Wealth Enhancement Group. It was part of a series of articles developed under an agreement with Forbes to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.

In May, the 51st annual meeting of Berkshire-Hathaway Inc. (Berkshire) was held in Omaha, NE. Thousands of shareholders descended on the city to pay homage to arguably the greatest investor of our time: Warren Buffett, Chairman and CEO of Berkshire. He has earned his reputation as a legendary investor through his remarkable track record of selecting stocks and businesses to invest in, both during his time managing investment partnerships in the 1950s and 1960s and then later as CEO of Berkshire, a position he’s held since 1965.

The annual meeting has often been dubbed “Woodstock for Capitalists.” Thousands of professional investors and countless millionaires congregate to hear Mr. Buffett discuss the company and to listen to an extensive question and answer session.

Mr. Buffett turned 86 on August 30, yet he and his older business partner, Vice Chairman Charlie Munger (age 92), have the endurance to field questions from amongst the crowd of over 40,000 shareholders for five hours. The questions range from narrowly focused queries  on one of Berkshire’s 80+ underlying business entities to broader questions surrounding the current business and economic climate throughout the world.

Warren Buffett: Index Investor?

In recent years, one of the more interesting points discussed relates to the recommended investment plan Mr. Buffett has for the assets he plans to leave his wife.  (It should be noted that all of Mr. Buffett’s Berkshire shares, currently worth over $65B, are earmarked for a few select charities after his passing.)  Mr. Buffett has instructed the trustee of his estate to invest 10% of the cash in bonds and 90% in the S&P 500. This portfolio is in stark contrast to what one might expect from perhaps the world’s greatest active investor, especially when you consider the track record Mr. Buffett has in identifying active managers.

So why is Buffett not exercising his good judgement one more time? I don’t think it’s because he suddenly believes in the efficient market hypothesis, which essentially says all information is always priced into the market and active management is a fools’ errand.

Instead, my guess is that Mr. Buffett, having witnessed the miracle of long-term compounding during his lifetime, knows a portfolio susceptible to frequent allocation changes is one of the biggest enemies most investors face. He has stated multiple times that the easiest way to hamstring your returns is by not participating in the long-term growth of American business vis-à-vis owning stocks. Rather than putting his faith in a few individual companies or a small number of asset managers, Mr. Buffett is putting his faith in the American stock market as a whole.

In October of 2008, amidst the financial crisis, he penned an op-ed in the New York Times stating “Buy American, I am.” While his statement was more emphatic back then, the asset allocation of Mr. Buffett’s trust is more evidence that owning stocks is a sound philosophy for long-term investors. It reminds me of the old proverb: Time in the market is more important than timing the market.

Click here to see the article on Forbes.

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