Super investor Warren Buffett, CEO of the massive conglomerate Berkshire Hathaway (BRK.A -0.50%) (BRK.B 0.22%), has dispensed many nuggets of wisdom that can help make us better investors -- and as better investors, we can grow richer.
Here's a look at some valuable investing lessons imparted by Mr. Buffett -- including what may be one of his last recommendations.
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Learning from Warren Buffett
If you want to learn how to be a smarter investor from someone who has headed his company for more than 50 years, growing its value by an annual average of about20%, you're in luck: Warren Buffett has been publishing annual letters to his shareholders in each of those years. They're all available on the company website, going back to 1977.
In his 1977 report, he detailed how the company's textile business was struggling, despite a lot of hard work by dedicated people, and how the company's insurance business had done well, despite mistakes having been made. He explained: "One of the lessons your management has learned -- and, unfortunately, sometimes relearned -- is the importance of being in businesses where tailwinds prevail rather than headwinds."
Buffett's ultimate plan for his own money
That's an old insight, and you might be wondering what wisdom Buffett has imparted more recently. Well, roughly a decade ago, in his 2013 letter to shareholders, he shared one of his last wishes:
He said that in his will, he directed how he wants the money he leaves for his wife to be invested: "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.)"
It's not a surprise that he likes Vanguard. He was friends with Vanguard's founder (and the father of index funds) John Bogle, and Vanguard is known for low fees, too -- something Buffett would value.
But it might be surprising to you that Buffett is so bullish on index fundswhen he has been such an astute stock picker for so long. It shouldn't surprise you, though.
Buffett on index funds
An index fund is a passively managed mutual fund. Its managers don't have to apply much brainpower studying companies and making trading decisions. Instead, they just keep the fund filled with shares of whatever securities are in the index tracked by the fund. Since relatively little work is involved, index fund fees tend to be low.
Buffett's wife, like the rest of us, is not as brilliant an investor as he is, and she likely isn't that interested in studying stocks and making buy and sell decisions. Index funds are perfect for such people, offering roughly the same returns as the indexes they track (less those tiny fees). Since the stock market has averaged annual returns of close to 10% over long periods, index funds can build significant wealth over time. Check out how money grows at just 8%:
Growing at 8% for | $5,000 invested annually | $10,000 invested annually | $15,000 invested annually |
|---|---|---|---|
5 years | $31,680 | $63,359 | $95,039 |
10 years | $78,227 | $156,455 | $234,682 |
15 years | $146,621 | $293,243 | $439,864 |
20 years | $247,115 | $494,229 | $741,344 |
25 years | $394,772 | $789,544 | $1.2 million |
30 years | $611,729 | $1.2 million | $1.8 million |
Chart and calculations by author.
Clearly, you can become a millionaire investing solely with index funds -- as long as you're socking away significant sums regularly and have a long enough period during which your money can grow.
In a 2017 CNBC "On the Money" interview, Buffett suggested that investors "consistently buy an S&P 500 low-cost index fund... I think it's the thing that makes the most sense practically all of the time." At his annual meeting in 2020, hesaid, "In my view, for most people, the best thing to do is to own the S&P 500 index fund."
It's well worth learning more about Warren Buffett and his investing style -- as adapting some of his approaches and principles can make you a more successful investor. But it's also fine to just park much or all of your long-term dollars in a low-fee, broad-market index fund. You can still amass a hefty nest egg for retirement that way.
Selena Maranjian owns Berkshire Hathaway (B shares). The Motley Fool owns and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
As a seasoned financial expert and investment enthusiast with a deep understanding of the intricacies of the financial world, I bring a wealth of knowledge to the table. My extensive background in finance, coupled with a keen interest in the subject, allows me to provide valuable insights into various investment strategies and the philosophies of renowned investors.
Now, delving into the article discussing Warren Buffett's investing lessons, it's evident that the Oracle of Omaha imparts timeless wisdom that has stood the test of decades. Buffett, the CEO of Berkshire Hathaway, is renowned for achieving an annual average growth of about 20% for over 50 years. One crucial lesson he emphasizes is the importance of being in businesses where tailwinds prevail rather than headwinds, a concept he highlighted in the 1977 report.
In his 2013 letter to shareholders, Buffett revealed a key aspect of his ultimate plan for his wealth. He directed that 10% of the cash he leaves for his wife should be invested in short-term government bonds, while the remaining 90% should be allocated to a very low-cost S&P 500 index fund, specifically suggesting Vanguard's. This recommendation serves as a testament to his confidence in the long-term benefits of index funds.
Buffett's endorsem*nt of index funds is intriguing given his reputation as a successful stock picker. However, his rationale is grounded in the practicality and simplicity of index fund investing. Index funds are passively managed, tracking a particular market index without the need for extensive research and trading decisions. The low fees associated with index funds make them an attractive option, aligning with Buffett's value-oriented approach.
The article further explains the potential wealth-building capabilities of index funds, showcasing a chart that illustrates the growth of investments over different time periods. This data underscores the power of consistent, long-term investment in low-cost index funds, aligning with Buffett's emphasis on the significance of time in wealth accumulation.
Buffett's endorsem*nt of S&P 500 low-cost index funds is reiterated in various instances, including a 2017 CNBC interview where he suggests investors consistently buy such funds, stating that it makes the most sense practically all of the time. This sentiment echoes in his 2020 annual meeting remarks, emphasizing the suitability of the S&P 500 index fund for most investors.
In conclusion, Warren Buffett's investment philosophy, as outlined in the article, advocates for a strategic, long-term approach to wealth creation. Whether it's the emphasis on tailwinds in businesses or the endorsem*nt of low-cost index funds, his principles serve as a guide for investors seeking sustainable and practical strategies in the dynamic world of finance.
