Indexing the Buffett way – Vanguard Investments [Smart Investing]

Robin Bowerman | 11 March 2014

In Warren Buffett's latest annual letter to Berkshire Hathaway shareholders, the world's best-
known investor has - not surprisingly - some no-nonsense advice for investors.

As expected, he gets straight to the point. In short, one of his tips is to invest in market-tracking
index investment funds in preference to actively-managed funds.

Particularly given Buffett's immense wealth, everyday investors tend to listen closely to his
thoughts about how to invest successful. (Forbes magazine this month named the 83-year-old
as the world's fourth richest person with a net wealth of $US58 billion.)

"You don't need to be an expert in order to achieve satisfactory investment returns," Buffett
writes. He suggest that investors: recognise their limitations, follow a course that should work
"reasonably well", keep things simple and reject promises of quick profits.

"Most investors, of course, have not made the study of business prospects [of listed companies]
a priority in their lives," he adds. "If wise, they will conclude that they don't know enough about
specific businesses to predict their future earning power."

He suggests investing in low-cost, market-tracking index funds rather than trying to pick
individual stocks or using high-cost fund managers.

Buffett says he is putting his "money where my mouth is" by directing in his will that much of
the cash being left in trust for his wife be invested in a large index fund.

"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," he emphasises.

By the way, all of Buffett's shares in Berkshire Hathaway, the company he chairs, are being left
to philanthropic causes and therefore will not form part of his deceased estate.

Read Warren Buffett's annual letter to Berkshire Hathaway shareholders here (PDF).

As Smart Investing has regularly discussed in the past, most actively-managed funds struggle to
at least match their appropriate indices as their high fees handicap their real returns. (See The
relationship between cost and performance, February 11, 2014.)

Written by Robin Bowerman, Principal, Market Strategy and Communications at

Vanguard Australia.
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