Warren Buffett(himself) has never invested in an Index fund, WHY?

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rakamaka
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Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by rakamaka » Fri Oct 28, 2016 7:41 am

If SEC abandons rules of $$$ amounts invested by individual in index funds or any other strict regulations for billionaires, Will Warren Buffett invest his money in index funds(or mutual funds)??? Why and Whynot? Although he suggest index for retail investor but never do it for himself. (mutual fund is the best vehivle for him considering he is extra cautious or capital protective person)..
I guess he will NOT....... because
--Index funds dont generate any real returns. Yes that is true. there is just increase in price (NAV) which we foolishly consider return...only return 'INTO my bank account' is dividends payout which is paltry 2-3% compared to 10-20% cash Berkshire subsidiaries send to Warren..
--one has to sell fund to realize gains or else risk of vaporizing gains. I donot want to loose 30% of wealth at age of 65..
--market capitalization based index, don't satisfy Buffett's(or any other wealthy investors') intellectual ability. He buys companies based on strong earnings/balance sheet not based on market cap.
---Buffett don't believe any human indexer has ability to pick up/select 500 best companies that goes into index. Fund manager is just an accountant to assign cash received to index created by some academician.
Will some billionaire invest in index funds(if SEC bends rules)??
Last edited by rakamaka on Fri Oct 28, 2016 7:54 am, edited 1 time in total.

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by Quark » Fri Oct 28, 2016 7:51 am

Warren Buffet doesn't invest in index funds because he believes he has a great deal of investing skill. He may be right, but he's highly unusual. He is a strong believer in index funds and has recommended his wife invest in index funds after he dies. Unless you have a Warren Buffett level track record (I'll guess not), the odds are rather high your equity investments should be in index funds.
rakamaka wrote:If SEC abandons rules of $$$ amounts invested by individual in index funds or any other strict regulations for billionaires,
What? Please cite or link to these rules?

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Re: Warren Buffett(himself) has never invested in Index fund, WHY?

Post by nisiprius » Fri Oct 28, 2016 7:51 am

rakamaka wrote:...Index funds dont generate any real returns. Yes that is true.
No, that is not true.
...there is just increase in price (NAV) which we foolishly consider return...only return 'INTO my bank account' is dividends payout...
1) Possibly you don't understand that index funds track a total return index, including dividends, not a price index.

The S&P 500 price index, the one that's mentioned in the news as "the S&P 500," was 1,377 on 10/27/2006 and it was $2,133 yesterday. Nevertheless, if you had invested $1,377 in the Vanguard 500 Index Fund on 10/27/2006, yesterday, you would have seen, not just $2,133, but $2,613 in your account. Why? Because the fund is giving you the total return, not just the price gain (capital appreciation).

2) You may consider it "foolish" to consider capital appreciation as return, but words are best used for communicating and the standard definition of investment "return" is "The gain or loss of a security in a particular period. The return consists of the income and the capital gains..." Maybe you don't like capital gains but I can put them in my bank account if I like and they will pay the bills just as well as dividends.

3) What do you think these things are? Where do you think they go if you don't choose to reinvest them? These are the dividend payments from the Vanguard 500 Index Fund, VFINX

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by tadamsmar » Fri Oct 28, 2016 7:54 am

He has directed his heirs to put his estate in index funds.

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Re: Warren Buffett(himself) has never invested in Index fund, WHY?

Post by rakamaka » Fri Oct 28, 2016 8:03 am

Index Dividends are paltry 2-3% which comes in my bank account, compared to 10-20% cash/profit generated by BH subsidiaries goes into BH's main account.
'Return' is something which comes back to me. not a paper gains happening in brokerage/fund account.
example: If I have 30% gain on my Macdonald stock, I cannot tender share certificate to buy burger, I must sell shares, collect those 30% return as cash and then buy burger.
3) What do you think these things are? Where do you think they go if you don't choose to reinvest them? These are the dividend payments from the Vanguard Total Stock Market Index Fund.

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Re: Warren Buffett(himself) has never invested in Index fund, WHY?

Post by KlangFool » Fri Oct 28, 2016 8:15 am

rakamaka wrote:Index Dividends are paltry 2-3% which comes in my bank account, compared to 10-20% cash/profit generated by BH subsidiaries goes into BH's main account.
'Return' is something which comes back to me. not a paper gains happening in brokerage/fund account.
example: If I have 30% gain on my Macdonald stock, I cannot tender share certificate to buy burger, I must sell shares, collect those 30% return as cash and then buy burger.
3) What do you think these things are? Where do you think they go if you don't choose to reinvest them? These are the dividend payments from the Vanguard Total Stock Market Index Fund.
rakamaka,

1) Are you Warren Buffett?

<<compared to 10-20% cash/profit generated by BH subsidiaries goes into BH's main account.>>

2) What has that got to do with the individual investor? How does that help the BRK owner?

<< 'Return' is something which comes back to me. not a paper gains happening in brokerage/fund account. >>

3) BRK does not distribute a dividend. So, as per your own statement, you should not invest in BRK either.

4) Warren Buffett does not buy companies. Warren Buffett owns BRK that bought companies. Warren Buffett is a shareholder of BRK.

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Re: Warren Buffett(himself) has never invested in Index fund, WHY?

Post by nisiprius » Fri Oct 28, 2016 8:20 am

rakamaka wrote:Index Dividends are paltry 2-3%
But what you said was that "Index funds dont generate any real returns."
'Return' is something which comes back to me. not a paper gains happening in brokerage/fund account.... for example: If I have 30% gain on my Macdonald stock, I cannot tender share certificate to buy burger, I must sell shares, collect those 30% return as cash and then buy burger.
We aren't talking about individual stocks, we're talking about mutual funds (index funds in particular).

I personally happen to agree with you (not everybody does) that are returns are not "real" until they are realized... that is, in my bank account.

However, I can go online and in ten minutes I can tell Vanguard to automatically withdraw $100 every month from my index fund and put it into my bank account.

Vanguard has even sent me a checkbook that draws from my bond index fund. Any place that accepts the checks from my checking account will accept these. I can only do this with a bond fund, not a stock fund, and I can't write them for less than $250 each, and I don't think McDonald's takes checks, so, no, I can't use them at McDonald's.

Mutual funds provide daily liquidity and the ability to sell in exact dollar amounts, as little as $100. With most mutual fund companies if you hold the funds directly with the company there is no commission, fee, or cost to do this.

Have you personally ever invested in a mutual fund? Do you understand how they work?
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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by Spewin » Fri Oct 28, 2016 8:56 am

rakamaka wrote:only return 'INTO my bank account' is dividends payout which is paltry 2-3% compared to 10-20% cash Berkshire subsidiaries send to Warren..
Your post is full of misunderstandings and contradictions, as others have pointed out. But, the funniest to me, by far, is that you argue that WB does not invest in index funds because they don't pay enough dividends.

WB is a billionaire because he is invested in Berkshire Hathaway stock. That's how he made all his money. That stock has never payed a dividend and won't as long as WB has anything to say about it. WB's investments have nothing to do with dividends.

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by nisiprius » Fri Oct 28, 2016 9:41 am

Rakamaka, I'd appreciate it if you'd say a bit more about your own point of view on this.

1) Are you actually trying to decide what to invest in, personally, for yourself?

2) Are you an admirer of Warren Buffett who advocates buying Berkshire Hathaway stock instead of buying an index fund?

3) Are you advocating a strategy you've developed for yourself, based on a portfolio of individual stocks, and trying to gain credence by saying that both you and Warren Buffett invest in individual stocks rather than index funds, and therefore you and Warren Buffett are doing the same thing?

4) Or something else?
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Re: Warren Buffett(himself) has never invested in Index fund, WHY?

Post by dbr » Fri Oct 28, 2016 9:53 am

rakamaka wrote:Index Dividends are paltry 2-3% which comes in my bank account, compared to 10-20% cash/profit generated by BH subsidiaries goes into BH's main account.
'Return' is something which comes back to me. not a paper gains happening in brokerage/fund account.
example: If I have 30% gain on my Macdonald stock, I cannot tender share certificate to buy burger, I must sell shares, collect those 30% return as cash and then buy burger.
You can define return differently from the way the rest of the world defines it and the only result will be miscommunication and pointless discussion.

That said, you are perfectly free to select investments based on criteria other than return, such as rate of payout of cash by those investments. Whether doing do actually makes any sense can be discussed. If it works for you, then far be it for me to advise you otherwise.

I am not particularly familiar with Mr. Buffett's methods of investment and financial management, so I have to leave that to you.

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by grayfox » Fri Oct 28, 2016 10:57 am

In his annual letter to shareholders, Warren Buffet uses the S&P500 as a benchmark.

Berkshire's Performance vs the S&P 500

Code: Select all

                      Compounded Annual Gain 1965-2015
S&P 500 with Dividends           9.7%
Per-Share Book Value of BH      19.2%
Per-Share Market Value of BH    20.8%
He don't need no stinkin' S&P500. :D

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by Ricola » Fri Oct 28, 2016 11:48 am

Buffett invests other people's money into the index he is creating.

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by triceratop » Fri Oct 28, 2016 11:50 am

Another consideration in addition to the many points raised:

Warren Buffett would take a substantial tax hit if he sold Berkshire-Hathaway stock to purchase an index fund. Why do that when he can perform at least as well as the S&P500, uses his Berkshire-Hathaway stock to control the company, and has no personal use for his vast wealth?
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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by Pajamas » Fri Oct 28, 2016 12:04 pm

Warren Buffett is a full-time investor and business manager. If he invested in index funds he would be out of a job.

His recommendation for his wife after his death is 10% short-term government bonds and 90% low-cost S&P 500 index fund. Of course she is and will be very wealthy, so a 90% stock allocation is appropriate for her.

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by Dyloot » Fri Oct 28, 2016 1:08 pm

I love Buffett. I've read his biographies. From them, I learned he does what we cannot.

He's an active participant in his investing. He's been invited to invest in companies, at reduced costs, for various reasons (stability, non-risk of hostile takeover, etc). He joins boards. He influences companies. He installs management teams in some companies. He has valuable colleagues.

And, perhaps most importantly, he's spent most of his life totally focused on money. As far as I could tell from the books, he didn't really care about what the money could get him. He just cared about making it. Later, he became philanthropic--but, by then, his portfolio had already been set for decades.

He's quite interesting. His insights go contrary to what many of my friends enjoy--investing in innovation, and exciting companies. He famously said that if you could go back to the early days of the automobile, you'd have been far more successful in shorting the horse than you would have been in backing emerging car companies--most of which failed.

So, apples to oranges. You cannot compare yourself, as a stock picker, to Buffett, because he's not playing the same game you're competing in.

Thus, the index fund. He's recommended these funds dozens of times (that I've seen) because none of us are in his league--and frankly, I'm not sure anyone else is, either.

For those interested, this one was my favorite biography:

https://www.amazon.com/Snowball-Warren- ... +biography

I notice some reviews say it's long/bloated/wordy, but I absolutely loved in. Read it cover to cover during the holidays a few years back.

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by BogleMelon » Fri Oct 28, 2016 1:28 pm

Some people choose to invest in their "own business" rather than "others business". It is more risky, as there is a big chance of failure, but more rewarding for the minority who do it.
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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by dave_k » Fri Oct 28, 2016 4:03 pm

Dyloot wrote:So, apples to oranges. You cannot compare yourself, as a stock picker, to Buffett, because he's not playing the same game you're competing in.

Thus, the index fund. He's recommended these funds dozens of times (that I've seen) because none of us are in his league--and frankly, I'm not sure anyone else is, either.
+1
lagflag wrote:Some people choose to invest in their "own business" rather than "others business". It is more risky, as there is a big chance of failure, but more rewarding for the minority who do it.
+1 - If I had not done this, I would not have as much to invest in index funds as I do at this point. However, it was many years before I was even at break-even compared to where I would have been working for someone else, let alone ahead. Risky and a roller coaster ride for sure!

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by badbreath » Fri Oct 28, 2016 4:30 pm

WB invests in Berkshire-Hathaway which is a index fund that he set up
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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by spectec » Sat Oct 29, 2016 11:10 am

There is one sense in which BH is the best proxy for an index fund - it is highly tax-efficient because there are never any unexpected CGD's to report.
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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by Stonebr » Sat Oct 29, 2016 2:59 pm

rakamaka wrote:..only return 'INTO my bank account' is dividends payout which is paltry 2-3% compared to 10-20% cash Berkshire subsidiaries send to Warren..
-
The 10-20% that BRK earns (I don't know where you got that figure, maybe based on book value rather than market?) from its wholly owned subsidiaries includes all profits. The 2% dividends that I earn on an index fund include only a portion of the profits of the companies in the index. The rest is reinvested by those companies in their future growth.
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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by sambb » Sat Oct 29, 2016 2:59 pm

warren buffet is stock picker, glad to see he was lucky and did well.

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by JoMoney » Sat Oct 29, 2016 3:30 pm

Warren Buffett buys individual businesses that he understands, at a price he thinks is reasonably beneficial to him/the holding company he operates.
The market is extremely competitive with regard to pricing investments, getting an advantage is not an easy task, but it's something that over time Buffett has shown to be very successful at it. Even he recognizes this skill is not something everyone has the faculties for. He doesn't suggest that most people try to, and he's said that the money being left his wife will be follow an index portfolio.
If Lebron James was planning for how his wife should earn money if he suddenly passed away, I doubt he would leave her a basketball and suggest she try to earn a living playing professional basketball, but that doesn't mean he shouldn't continue playing.
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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by JoMoney » Sat Oct 29, 2016 3:44 pm

FWIW, Buffett has a million dollar bet that the 'Vanguard 500 Index Fund Admiral Shares (VFIAX)' fund will beat the hedge funds picked by someone else.
http://longbets.org/362/

He (or his company) sold long dated put options on the S&P500 (and some other indexes), essentially betting/insuring against the value of the index being lower 15 to 20 years in the future
http://www.cboeoptionshub.com/2014/08/0 ... put-trade/

So while he may not have directly bought an index (and I don't really know that he hasn't), he has made several large bets on the S&P500 that effectively benefit him as long as the index does well.
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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by boglephreak » Sat Oct 29, 2016 5:48 pm

im a lawyer so when i have a legal question, i usually look it up myself. i dont hire an attorney. my wife is not, and when i die i recommend she hire a lawyer to help her with legal issues. i imagine its the same for someone who devotes his time and life to investing that he invest it himself, but that he not recommend it to his wife (who he has recommended invest in S&P500).

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by Mike H » Sat Oct 29, 2016 6:51 pm

I see Warren as a sublime business man rather than an investor.
His company buys simple to understand businesses that are cheap and then applies their proven business model to to optimize returns.
Simply, he doubles the market return because he has two bites of the cherry and we have one.
He has also 50 years of experience,a unique brain, a brilliant colleague and huge research and administrative teams to make that happen.

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by nisiprius » Sat Oct 29, 2016 7:33 pm

Based on your recommendation I have put that on my mental to-read list.

One of the things that drives me bananas about people using Warren Buffett to buttress arguments is that Buffett himself--very unlike John C. Bogle--has written no books himself, and gives whatever advice he gives in the form of short, ambiguous maxims which cannot be clarified. Apart from press reports of speeches and his annual letter to Berkshire Hathaway shareholders, he doesn't put much on the record formally. I actually wrote to Berkshire Hathaway to ask whether his recommendation to use an S&P 500 index fund was specifically a recommendation not to include small-caps, and got no reply. We really don't know what he means by many of the things he says. There is a small cottage industry in books that purport to tell us what he means. Many advisors and even some mutual funds and ETFs are described as using his approach. But do they really?

For example, an article mentions ETFs That Value Investors Buffett, Munger Would Approve Of. Oh? I think these gentlemen can speak for themselves. I would be mildly interested to know what ETFs Buffett and Munger approve of, but someone else saying so without asking them, no.
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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by richardglm » Sat Oct 29, 2016 9:37 pm

Buffett has access to investments that we don't, including buying entire companies. He can also influence or select the management at these companies to make better business decisions. Buying a company and putting a highly skilled person as CEO is not stock picking, it is a skill based task where talent can pay off. There is no way a small investor can do these things, except maybe through expensive PE or hedge funds that negate any benefit.

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by dbr » Sun Oct 30, 2016 9:16 am

Warren Buffett does not buy index funds because he is an entrepreneur and not an investor in any sense relevant to most of us. Other posts make the same point about owning and operating companies.

The only recommendation he has made that we know of for us is to invest in an S&P 500 index funds and some bonds. And we don't know if that was really meant for people like us anyway.

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by 552BB » Sun Oct 30, 2016 10:00 am

Hello BH community,



Good morning nisiprius,


nisiprius wrote:
Based on your recommendation I have put that on my mental to-read list.

One of the things that drives me bananas about people using Warren Buffett to buttress arguments is that Buffett himself--very unlike John C. Bogle--has written no books himself, and gives whatever advice he gives in the form of short, ambiguous maxims which cannot be clarified. Apart from press reports of speeches and his annual letter to Berkshire Hathaway shareholders, he doesn't put much on the record formally. I actually wrote to Berkshire Hathaway to ask whether his recommendation to use an S&P 500 index fund was specifically a recommendation not to include small-caps, and got no reply. We really don't know what he means by many of the things he says. There is a small cottage industry in books that purport to tell us what he means. Many advisors and even some mutual funds and ETFs are described as using his approach. But do they really?

For example, an article mentions ETFs That Value Investors Buffett, Munger Would Approve Of. Oh? I think these gentlemen can speak for themselves. I would be mildly interested to know what ETFs Buffett and Munger approve of, but someone else saying so without asking them, no.


Very good point. In fact Warren Buffet has written no books himself.

I, for one, would love to have him write a book.

I suspect that his answer to that would be that he writes his annual BH reports, and those represent his thoughts and ideas.



You did mention his very brilliant and silent partner Charlie Munger.

He has written some books, including one called Charlies Almanack.

I believe this is some of the closest we get to how Charlie Munger and Warren Buffet think.

It is one of my farovite books. In it he mentions in several places the superiority of index funds over actively managed funds.

I think it is a great read for those here on this forum.



:sharebeer

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by snowshoes » Sun Oct 30, 2016 10:59 am

Warren Buffet: Top 20 Secrets in Life & Business, by Alan Greenwich is a new 2016 offering in a series of writings about 8 of this era's technological(Gates), innovative(Tesla), and 8 other successful titans in industry. As to your inquiry about Warren Buffet, (imo), he recognizes value laden opportunities you or I would never hear of, or be able to act on. Good luck!

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by MAI » Sun Oct 30, 2016 11:48 am

tadamsmar wrote:He has directed his heirs to put his estate in index funds.
And at death, his estate gets the step up in basis, avoiding the huge tax hit he would take if he did it now.

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by jalbert » Sun Oct 30, 2016 12:15 pm

It has been reported that Mr. Buffett is leaving most of his fortune, which is in the form of shares of Berkshire-Hathaway stock, to charity.

If he sold this stock and reinvested in index funds he would pay tax on the gain and less of the asset would be directed to charity.

Perhaps the question is: why doesn't he invest any of Berkshire's assets in an index fund? I would add the question: do we know that Berkshire never has held an index fund in its asset portfolio?

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Re: Warren Buffett(himself) has never invested in an Index fund, WHY?

Post by dharrythomas » Sun Oct 30, 2016 1:12 pm

Warren Buffett, if what was written about his taxes is true, has more money than most of us are ever going to have invested outside of Berkshire. I read his reported income was $11M last year and his salary is $100K. Berkshire was one of the companies his investment partnership bought in the 1960s. When he shut down the partnership, he merged several of those wholly owned investments into Berkshire. He has always had investments outside of Berkshire and their return is high. WB has said that with a smaller stake, he could double the returns of the S&P 500. Many of his best ideas won't move the needle on a Fortune 10 business.

Buffett was an investor (he studied under and worked for Benjamin Graham) who has transitioned into a businessman. When he was running an investment partnership, he was paid with a percentage of investor return. A big portion of his fortune has its roots in the fees he earned managing the partnerships.

The other thing is that WB gets sweetheart deals now from companies that need to rent his reputation. That's because he built a fortune and a successful business. The success came from hard work before the reputation and the reputation came before any of the sweetheart deals.

In 1972, Adam Smith wrote in "Supermoney" about Buffett being "easily the outstanding money manager of the generation". And he did it from Omaha without advertising or even publicity before the 1970s.

Warren Buffett would never personally invest in index funds. I have no misconception that I'm Warren Buffett. Most of the rest of us are better off in index funds than in paying high fees chasing performance and looking for the next Buffett.

Good Luck.

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