Warren Buffett’s Boring Investment Advice Could Make You Rich
It pays to have a mentor who is able to give you good advice on investing. It is important to find someone you can trust and who has an excellent track record. Warren Buffett is a very respected person when it comes to investment advice. It’s not without reason. It is because he has given many people sound financial advice over the years. With this in mind, it makes sense to, at the very least, consider the investing advice that comes out of his mouth.
Whenever the Berkshire Hathaway annual report goes public, it’s read over by financial analysts with a fine toothed comb. It’s logical. The report is read by many people hoping to gain some insights that will help them in their investing. It’s funny that you don’t need to search very far to find Buffett’s investing advice. It’s because he makes it as clear as day for everyone to see.
Buffett’s Advice: Buy index funds and short term government bonds
In 2013, Warren Buffett wrote in a famous article that he had given his wife instructions on how to handle the money she will inherit when he passes away (here). You might expect the instructions to be complicated, since the money will come from one of world’s richest men. Warren Buffet told his wife that she should invest 90% of the inheritance in a low cost S&P 500 Index Tracker. He advised her to invest the remainder 10% in short-term government securities. That’s it. He writes:
Source : 2013 Berkshire Hathaway Shareholder Letter.
Studies show that very few fund managers can outperform S&P 500 for extended periods (Morningstar Dow Jones/Spiva NBER). The advice is nothing more than commonsense, given that active fund managers are likely to return less than an S&P 500 Index Fund while charging higher fees. Buffett’s advice is how he believes the majority of people should invest. This is how one of the world’s best investors wants his wife to invest after he passes away. When 90% of your funds are in index funds and the remaining 10% is government bonds, there is not much excitement in day-to-day life. In the short-term, it lacks any kind of excitement. A further problem with index funds, is that they only give you the market performance. Index fund holders can expect returns that are in line with the market. Investors will never be able to beat the market with index funds.
In some years, index funds have actually lost money. Here is an example of the S&P 500 charted by St. Louis Federal Reserve. The chart shows that the S&P 500 actually lost around 20 percent in 2022. Investors would have done better to hold corporate or government debt in that year.
Standard & Poors 500 index fund performance from 2020 to 2024.
Does Buffett practice what he preaches? He doesn’t.
The truth is that Buffett’s trading behavior and public pronouncements do not always match. Buffett publicly preaches the buy-and-hold strategy, but his trading has been much more diverse. Buffett’s early career was marked by arbitrage, short-term trades, and liquidations rather than index funds, buy-and-hold, or the techniques he made famous with 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
. This book explains the strategies Warren Buffett employs to trade the equity and bond markets. Altucher’s work is the most comprehensive and accurate account of Buffett’s career in trading that you will 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. The majority of Buffett’s career was spent buying and holding cash-rich companies, not index fund shares. You can get a detailed guide on how to do it by reading The Snowball: Warren Buffett & the Business of Life
. This book is a comprehensive and authoritative review of Buffett’s career, with many lessons for investors. Both books work well together to give you an excellent overview of what Buffett did to make his business successful.
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