Why Buffet likes S&P 500 Index over a TSM Index Fund?

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S17C
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Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by S17C »

Why does Buffet (and others) prefer S&P 500 Index over a Total Stock Market index fund?
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by AlohaJoe »

When you used the search function for this question, what did the results say?
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by PFInterest »

because they evolved in a time where TSM didnt exist.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by dbr »

AlohaJoe wrote:When you used the search function for this question, what did the results say?
That is the best answer.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by nisiprius »

As far as I know, Buffett has never said that he prefers the Vanguard 500 Index Fund over the Vanguard Total Stock Market Index fund. He has indeed specifically recommended "an S&P 500 fund," and has added "I suggest Vanguard's." But he has never mentioned Total Stock or explained why he recommended something else. I am convinced that the answer is "nobody knows, and nobody will know until he chooses to explain himself."

What experts do you know who have specifically said they prefer an S&P 500 fund over a total stock market fund? I'm honestly curious.

(I actually wrote his office asking about this, I'll write to anybody about anything, but I received no reply).
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by dbr »

PFInterest wrote:because they evolved in a time where TSM didnt exist.
This is a good answer also. One could add that the S&P 500 is basically a who's who of the vibrant and successful American corporate economy which Mr. Buffett has made his hunting ground. It is the paradigm for everything he thinks is successful in investing, the place of his expertise, and the source of his unshakeable faith in the soundness of his principles.

PS I agree with the above post that neither Buffett nor Bogle have said explicitly that people should not invest in TSM but should invest in S&P 500 instead. I think the response might be, and Mr. Bogle has said as much I think, that TSM would "be good too."
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by Sandtrap »

TSM is more diversified. Per "Bogle" emphasis on diversification. . . therefore. . . .?
Perhaps get both?
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by livesoft »

The companies that he owns are probably almost exclusively in the S&P500 index, aren't they? He doesn't want you to buy stocks without buying stocks of his companies', too.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by dbr »

Sandtrap wrote:TSM is more diversified. Per "Bogle" emphasis on diversification. . . therefore. . . .?
Perhaps get both?
Buffett, on the other hand operates on the principle of carefully selecting well run companies available at cheap prices. He is not interested in diversification in the sense of broadly representing asset classes of stocks.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by Svensk Anga »

Buffett looks to invest in companies with "deep moats". That is, companies that have such well established businesses or competitive advantages that would-be competitors have a hard time getting a share of the market. I would think it unlikely that companies in the small cap end of the market could establish such a deep moat. Anyone with enough capital could displace the current players in these lines of business. So I suspect that Buffett has a considered preference for the large-caps.

Or it could be that he is managing so much capital ($0.41 trillion market cap), that it is impractical for him to concern himself with small-caps.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by bertilak »

I don't think it really matters: Morningstar Chart

I keep this in mind in case I ever want to do tax loss harvesting of my TSM fund.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by avalpert »

dbr wrote:
Sandtrap wrote:TSM is more diversified. Per "Bogle" emphasis on diversification. . . therefore. . . .?
Perhaps get both?
Buffett, on the other hand operates on the principle of carefully selecting well run companies available at cheap prices. He is not interested in diversification in the sense of broadly representing asset classes of stocks.
The S&P 500 doesn't fit that description any more than a total market fund does.

My hunch would be it is simply because of familiarity and the long history of using it as shorthand for overall market performance. If someone asked directly would you recommend not using Vanguard's large cap index, or total market index my guess is he would say those are fine to. I think it would be more interesting to get his take on Value indexes and whether he sees it as a way for average investors to invest like him or anathema to the endeavor.

This type of question is more the result of using someone's offering of broad advice to try to create very specific courses of action. Oh, and not searching for the dozens of threads that have covered it before.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by MrKnight »

He uses s&p 500 as an example because that's what most pepole areally familiar with and it's good enough.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by dbr »

avalpert wrote:
dbr wrote:
Sandtrap wrote:TSM is more diversified. Per "Bogle" emphasis on diversification. . . therefore. . . .?
Perhaps get both?
Buffett, on the other hand operates on the principle of carefully selecting well run companies available at cheap prices. He is not interested in diversification in the sense of broadly representing asset classes of stocks.
The S&P 500 doesn't fit that description any more than a total market fund does.

My hunch would be it is simply because of familiarity and the long history of using it as shorthand for overall market performance. If someone asked directly would you recommend not using Vanguard's large cap index, or total market index my guess is he would say those are fine to. I think it would be more interesting to get his take on Value indexes and whether he sees it as a way for average investors to invest like him or anathema to the endeavor.

This type of question is more the result of using someone's offering of broad advice to try to create very specific courses of action. Oh, and not searching for the dozens of threads that have covered it before.
You are correct in your observations. The S&P 500 thing would be for other people and not for him. Maybe the answer really is just familiarity and as a shorthand. From what I have read of his own musings about investing I don't think he sees anyone investing like him, and I don't think he would see any index as a way to invest like him. The overall impression I get is that he invests according to his perception of the idiosyncratic factors in individual investments, and he does not buy shares but rather ownership and management.

You are quite correct in the observation that these issues come to a head when people try to create specific courses of action from general advice that does not contain a specific course of action. It takes a little more work to invest than asking someone to specify in three sentences exactly what to do.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by anil686 »

Nobody knows...

I will say that this board way overestimates the common person's interest in investing (I do the same). I was at a get together a few weeks ago and the subject of investing came up via a person referring to their adviser. Another person mentioned the SP500 - literally a few people (well educated physicians I might add) looked at that person and asked - what is the SP 500? When people talk about the SP500 or a total market index fund, I think the reality is that a certain percentage of people know about the SP 500 (I do not know what that percentage is but it is not as high as people on this board think). But a much smaller fraction of that number knows about a total market index fund. And among those who know about both funds, fewer know how it is setup (i.e. cap weighted). JMO though and so I do not put a lot of effort in figuring out why somebody says one over the other - to me they are fairly interchangeable although I prefer TSM due to better adhering to the theory of indexing... Hope that helps...
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by Phineas J. Whoopee »

This was my take a couple of years ago, but it doesn't reference Buffett in particular.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by nisiprius »

One can make many different, very plausible guesses as to why Buffett chooses to mention S&P 500 index funds, and simply doesn't mention total market index funds, but they're just guesses... (unless any of the Buffett admirers who have read more than I have can point me to anything he's said on the topic).
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by pascalwager »

Why would Buffett describe his wife's 90/10 portfolio using the S&P 500 if he didn't consider it a learning opportunity for the average investor? Otherwise, why would we want to hear about her portfolio? (He has also stated that an S&P 500 investment only applies to someone with a 20-year or greater investment horizon.)

Therefore, in my mind, Buffett wants us to understand that long-term investors should be largely invested in the S&P 500, but with 10% in T-Bills.

Of course, for various reasons, many will be indifferent to whatever Buffett wants us to understand.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by avalpert »

pascalwager wrote:Why would Buffett describe his wife's 90/10 portfolio using the S&P 500 if he didn't consider it a learning opportunity for the average investor? Otherwise, why would we want to hear about her portfolio? (He has also stated that an S&P 500 investment only applies to someone with a 20-year or greater investment horizon.)

Therefore, in my mind, Buffett wants us to understand that long-term investors should be largely invested in the S&P 500, but with 10% in T-Bills.

Of course, for various reasons, many will be indifferent to whatever Buffett wants us to understand.
Because Buffett's job isn't to provide learning opportunities for the average investor, he isn't a cult leader setting out specific orders or a monk guiding you to enlightenment. His words aren't chosen or intended to be interpreted like those in laws, supreme court decisions or the Bible.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by pascalwager »

avalpert wrote:
pascalwager wrote:Why would Buffett describe his wife's 90/10 portfolio using the S&P 500 if he didn't consider it a learning opportunity for the average investor? Otherwise, why would we want to hear about her portfolio? (He has also stated that an S&P 500 investment only applies to someone with a 20-year or greater investment horizon.)

Therefore, in my mind, Buffett wants us to understand that long-term investors should be largely invested in the S&P 500, but with 10% in T-Bills.

Of course, for various reasons, many will be indifferent to whatever Buffett wants us to understand.
Because Buffett's job isn't to provide learning opportunities for the average investor, he isn't a cult leader setting out specific orders or a monk guiding you to enlightenment. His words aren't chosen or intended to be interpreted like those in laws, supreme court decisions or the Bible.
Then why tell us about his wife's portfolio? Is that part of his job?
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by JoMoney »

FWIW,
There was a 2010 interview by Ben Stein where Buffett was asked about VTI (Total Stock Market):
http://archive.fortune.com/2010/10/18/p ... /index.htm
...
What should a typical upper-middle-class person in the U.S. buy to prepare for retirement?

"Equities," Buffett answers without a moment's hesitation.

"The VTI?" I ask.

"That's good enough. Maybe a selection of high-dividend-paying stocks that are likely to raise their dividends. Maybe the top 100 dividend payers of the S&P 500."

Then, after a second's thought, he adds, "Well, maybe not that, but equities." ...
Last edited by JoMoney on Sun Apr 02, 2017 11:42 pm, edited 1 time in total.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by avalpert »

pascalwager wrote:
avalpert wrote:
pascalwager wrote:Why would Buffett describe his wife's 90/10 portfolio using the S&P 500 if he didn't consider it a learning opportunity for the average investor? Otherwise, why would we want to hear about her portfolio? (He has also stated that an S&P 500 investment only applies to someone with a 20-year or greater investment horizon.)

Therefore, in my mind, Buffett wants us to understand that long-term investors should be largely invested in the S&P 500, but with 10% in T-Bills.

Of course, for various reasons, many will be indifferent to whatever Buffett wants us to understand.
Because Buffett's job isn't to provide learning opportunities for the average investor, he isn't a cult leader setting out specific orders or a monk guiding you to enlightenment. His words aren't chosen or intended to be interpreted like those in laws, supreme court decisions or the Bible.
Then why tell us about his wife's portfolio? Is that part of his job?
Well, it was an anecdote he included to suggest that what he was writing in his letter to shareholders (which yes is part of his job) was also what he was doing for his own family.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by JoMoney »

I like the idea that Buffett picked it because the 'Total Stock Market' has more linkage to the 'Efficient Market' school of thought, something that Buffett thumbs his nose at.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by whodidntante »

I wondered why he doesn't recommend value ETFs, since he clearly hates growth stocks and is a value investor. But then I realized he is not a value investor in a quant sense. Buffet makes some comments about discounted cash flows and Benjamin Graham when he talks, but he never really spills the beans about how he values a company or how he makes an investment decision. I think he picks stocks like a poker player makes good calls. He is informed, but he doesn't have complete information or an algorithm.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by JoMoney »

whodidntante wrote:I wondered why he doesn't recommend value ETFs, since he clearly hates growth stocks and is a value investor. But then I realized he is not a value investor in a quant sense. Buffet makes some comments about discounted cash flows and Benjamin Graham when he talks, but he never really spills the beans about how he values a company or how he makes an investment decision. I think he picks stocks like a poker player makes good calls. He is informed, but he doesn't have complete information or an algorithm.
He actually has explained his valuation method (multiple times) people just don't accept it because it's not based on the same kinds of quantitative multiples people can screen for. It requires understanding of the business and being able to put a price on the business as a whole.
He does poo-poo the types of P/E screening typical "value investors" talk about, and he's also talked about the impact "Growth Investor"/author Phillip Fisher had on his way of thinking.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by dbr »

JoMoney wrote:
whodidntante wrote:I wondered why he doesn't recommend value ETFs, since he clearly hates growth stocks and is a value investor. But then I realized he is not a value investor in a quant sense. Buffet makes some comments about discounted cash flows and Benjamin Graham when he talks, but he never really spills the beans about how he values a company or how he makes an investment decision. I think he picks stocks like a poker player makes good calls. He is informed, but he doesn't have complete information or an algorithm.
He actually has explained his valuation method (multiple times) people just don't accept it because it's not based on the same kinds of quantitative multiples people can screen for. It requires understanding of the business and being able to put a price on the business as a whole.
He does poo-poo the types of P/E screening typical "value investors" talk about, and he's also talked about the impact "Growth Investor"/author Phillip Fisher had on his way of thinking.
One of the things he talks about is quality of management. It's almost an "old fashioned" paean to character and ethics in management, with proven skills to run the business effectively. He gets his information by knowing the people involved personally. It is true that you can't screen for it or put it in an algorithm.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by pascalwager »

avalpert wrote:
pascalwager wrote:
avalpert wrote:
pascalwager wrote:Why would Buffett describe his wife's 90/10 portfolio using the S&P 500 if he didn't consider it a learning opportunity for the average investor? Otherwise, why would we want to hear about her portfolio? (He has also stated that an S&P 500 investment only applies to someone with a 20-year or greater investment horizon.)

Therefore, in my mind, Buffett wants us to understand that long-term investors should be largely invested in the S&P 500, but with 10% in T-Bills.

Of course, for various reasons, many will be indifferent to whatever Buffett wants us to understand.
Because Buffett's job isn't to provide learning opportunities for the average investor, he isn't a cult leader setting out specific orders or a monk guiding you to enlightenment. His words aren't chosen or intended to be interpreted like those in laws, supreme court decisions or the Bible.
Then why tell us about his wife's portfolio? Is that part of his job?
Well, it was an anecdote he included to suggest that what he was writing in his letter to shareholders (which yes is part of his job) was also what he was doing for his own family.
Well then, I don't understand why he would be advising his own shareholders to invest in the S&P 500; but I'm sure he understands that his annual letter circulates widely at large, within the investment community and beyond.

Also, he has advised investing in the S&P 500 during interviews.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by avalpert »

pascalwager wrote:
avalpert wrote:
pascalwager wrote:
avalpert wrote:
pascalwager wrote:Why would Buffett describe his wife's 90/10 portfolio using the S&P 500 if he didn't consider it a learning opportunity for the average investor? Otherwise, why would we want to hear about her portfolio? (He has also stated that an S&P 500 investment only applies to someone with a 20-year or greater investment horizon.)

Therefore, in my mind, Buffett wants us to understand that long-term investors should be largely invested in the S&P 500, but with 10% in T-Bills.

Of course, for various reasons, many will be indifferent to whatever Buffett wants us to understand.
Because Buffett's job isn't to provide learning opportunities for the average investor, he isn't a cult leader setting out specific orders or a monk guiding you to enlightenment. His words aren't chosen or intended to be interpreted like those in laws, supreme court decisions or the Bible.
Then why tell us about his wife's portfolio? Is that part of his job?
Well, it was an anecdote he included to suggest that what he was writing in his letter to shareholders (which yes is part of his job) was also what he was doing for his own family.
Well then, I don't understand why he would be advising his own shareholders to invest in the S&P 500; but I'm sure he understands that his annual letter circulates widely at large, within the investment community and beyond.

Also, he has advised investing in the S&P 500 during interviews.
He's also suggested other broad-based index funds fit the bill - you are writing precision into his words that aren't intended or warranted.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by JoMoney »

avalpert wrote:...
He's also suggested other broad-based index funds fit the bill - you are writing precision into his words that aren't intended or warranted.
He has generically mentioned "equities" and using a broad based low cost index fund, but he has also repeatedly and specifically suggested using a S&P 500 index fund, he's even mentioned Vanguard specifically. You may feel that the annual letter guidance was somehow just "anecdotal" on his suggestion, but the details of his million dollar wager against the hedge funds is very specific in using the VFIAX Vanguard 500 fund.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by lazyday »

JoMoney wrote:FWIW,
There was a 2010 interview by Ben Stein where Buffett was asked about VTI (Total Stock Market):
http://archive.fortune.com/2010/10/18/p ... /index.htm
...
What should a typical upper-middle-class person in the U.S. buy to prepare for retirement?

"Equities," Buffett answers without a moment's hesitation.

"The VTI?" I ask.

"That's good enough. Maybe a selection of high-dividend-paying stocks that are likely to raise their dividends. Maybe the top 100 dividend payers of the S&P 500."

Then, after a second's thought, he adds, "Well, maybe not that, but equities." ...
Ben Graham, sometimes called Buffett's mentor, wrote suggestions in The Intelligent Investor for those who want to invest more passively. I think it involved owning large, leading companies.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by nisiprius »

Buffett chooses not to explain his reasons.

Nor does he explain his reasons for not explaining his reasons.

I love this:
"The VTI?" I ask.

"That's good enough. Maybe a selection of high-dividend-paying stocks that are likely to raise their dividends. Maybe the top 100 dividend payers of the S&P 500."

Then, after a second's thought, he adds, "Well, maybe not that, but equities."
You just can't make anything out of that. Do you realize just how vague it is?

For example, you can't even tell whether "Well, maybe not that, but equities" means "VTI is good enough... well, maybe not that" or "maybe the top 100 dividend payers of the S&P 500, well maybe not that."

You can't tell if he means "VTI is good enough, but VIG would be better." (VIG is a Vanguard ETF that tracks an index of companies in the past have had a record of growing their dividends... which, of course, is not the same as "a selection of high-dividend-paying stocks that are likely to raise their dividends" going forward.)

And Buffett has never as far as I know come to grips directly with the question "why do I recommend an S&P 500 index fund instead of shares in BRK?"
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by knpstr »

I'd guess because it [S&P 500] is "well known" and, to use a term not thrown around much now, is more "Blue Chips" heavy than TSM.

In any case, either fund should produce satisfactory results.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by knpstr »

lazyday wrote:
Ben Graham, sometimes called Buffett's mentor, wrote suggestions in The Intelligent Investor for those who want to invest more passively. I think it involved owning large, leading companies.
Yes he [Graham] said to own no fewer than 10 and no more than 30 stocks as to not "over diversify".
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by JoMoney »

Buffett and Munger have a frequently stated policy: "We never recommend buying or selling Berkshire." it's something that's been asked many times on TV interviews and at the annual BRK meetings.

I think people are expecting too much getting into the minutia and thinking it somehow makes a difference what low cost diversified index fund you go with or that Buffett can tell you one is somehow better than another. If you were asking him about specific companies the he knows something about, (and provided he wasn't actively making purchases or sales in that interest,) I'm sure he would have something worth saying. But on one broad portfolio of diversified stocks to another, what's he supposed to say? He looks at individual businesses. He's not a 'factor' investor.
Most of what Buffett offers as advice is direct from the writings of Ben Graham and Phil Fisher, in The Intelligent Investor Graham wrote:
In discussing the common-stock portfolio of the defensive investor, we have spoken only of leading issues of the type included in the 30 components of the Dow Jones Industrial Average. We have done this for convenience, and not to imply that these 30 issues alone are suitable for purchase by him. ...
... But the major point here is that the defensive investor’s overall results are not likely to be decisively different from one diversified or representative list than from another, or—more accurately—that neither he nor his advisers could predict with certainty whatever differences would ultimately develop. It is true that the art of skillful or shrewd investment is supposed to lie particularly in the selection of issues that will give better results than the general market. For reasons to be developed elsewhere we are skeptical of the ability of defensive investors generally to get better than average results—which in fact would mean to beat their own overall performance. (Our skepticism extends to the management of large funds by experts.)
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by MikeG62 »

bertilak wrote:I don't think it really matters: Morningstar Chart

I keep this in mind in case I ever want to do tax loss harvesting of my TSM fund.
+1 (don't think it matters). TSM is so large cap heavy that it's performance is not likely to be very different from the S&P 500 (as that chart demonstrates). It's the reason I use a blend of three Index ETF's (LC, MC and SC), as I prefer a bit more weighting to mid/small than one gets with just the TSM.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by bottlecap »

livesoft wrote:The companies that he owns are probably almost exclusively in the S&P500 index, aren't they? He doesn't want you to buy stocks without buying stocks of his companies', too.
I had a different take to come the the same conclusion: that he is more fond of large value and the S&P is more weighed toward large value.

Your explanation makes even more sense...

There may not be a lot of difference between it and the TSM, but every basis point helps!

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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by Leesbro63 »

knpstr wrote:I'd guess because it [S&P 500] is "well known" and, to use a term not thrown around much now, is more "Blue Chips" heavy than TSM.

In any case, either fund should produce satisfactory results.
:beer
+1. My guess is that it's a generational habit. Like my 82 year old father referring to the "ice box", "stewardess", "stereo" and "front desk girl".
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arcticpineapplecorp.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by arcticpineapplecorp. »

S17C wrote:Why does Buffet (and others) prefer S&P 500 Index over a Total Stock Market index fund?
Who are these "others" of whom you speak?

My guess is Buffett wanted to show respect for Bogle so he said the S&P500 index fund because that is the one that Jack built. Jack tried very hard to get it off the ground. The underwriters didn't even get the amount they thought they would to launch the fund and wanted to return the investors money. from viewtopic.php?f=10&t=97574 :
"How did first index fund get started in practice? 1975. Bogle's fired as chief executive of Wellington Management Co., but directors allowed him to move over into accounting and legal compliance. Marketing and investment management key. Read "Challenge to Judgment" by Paul Samuelson, reminded him about mutual funds. Made persuasive case to directors, computations by hand, got permission to get index fund going. Initially called "Bogle's folly!" Opening didn't raise enough money to buy all the S&P stocks—underwriters only raised $11 million and suggested sending the money back."
Mr. Bogle stated Vanguard needed 150 million (I believe that's what he said in the interview) to open the S&P index fund but the underwriters could only get 11 million. In the interview, Mr. Bogle stated the underwriters asked if they should send the money back to the investors and Mr. Bogle said something to the effect of 'No, we'll just have to go with what we have' (not an exact quote).


Now Jack was certainly at the helm when the total stock market index fund was created (not created until 4/27/1992 as opposed to the S&P 500 in 8/31/1976 according to vanguard). But if memory serves (and I could be wrong) I remember Gus Sauter being at the helm of the total stock market index fund. I don't know if he "created it" but I don't remember Jack being hailed for the total stock market index fund through the years as he has been for the S&P500 index fund. Even though Jack himself has acknowledged that the Total stock market index fund is more representative of the stock market than the S&P500 index fund (and the very reason I switched from S&P500 to total stock market index fund soon after he made that comment on cnbc).

The fact that the S&P500 index fund has lasted as long as it has (been around longer than the total stock market index fund), Jack was excoriated for its creation (called "Bogle's Folly") and he's having the last laugh is testament to the respect that Jack deserves and has earned. And Buffett gave extraordinarily high praise for Jack in his latest annual shareholder letter. So I think (only a guess) he was giving high praise back then to Jack in a more subtle way than he recently has (in his shareholder letter). And at the same time attempt to influence millions of investors who are still basically speculating and gambling with individual stocks, active management, and financial advisors/brokers who are costing the public billions of dollars in unnecessary fees. Consider it a public service announcement. The S&P500 and total stock market index fund have done about the same over long periods. They're both great funds.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by NibbanaBanana »

S17C wrote:Why does Buffet (and others) prefer S&P 500 Index over a Total Stock Market index fund?
S&P 500 pays a higher dividend.
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nisiprius
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by nisiprius »

If Buffett explicitly prefers the S&P 500 over the total market, he could say so.

If Buffett explicitly prefers the S&P 500 because it pays a higher dividend, he could say so.

If Buffett explicitly prefers to recommend an S&P 500 fund because he thinks the difference from Total Market doesn't matter, and he thinks more of his listeners will have an S&P 500 index fund in their 401(k) and wants to keep the message simple, he could say so.

If Buffett explicitly prefers the S&P 500 because he thinks small-caps as a class are unsound, and that it reasonable to invest passively in the "leading companies in leading industries" (S&P's own description of the 500 index), but insane to invest in small-caps without consciously evaluating each one individually, he could say so.

If Buffett prefers the S&P 500 because he doesn't think the details matter and he likes John C. Bogle, he could say so.

If Buffett prefers the S&P 500 because he has known it for decades as the trusted measuring stick against which he compares BRK, and doesn't know the total market indexes that way, he could say so.

He doesn't say so.

To all the people who think it is so obvious what he thinks that he doesn't need to, and that they can read his mind and give his reasons for preferring the S&P 500, I respond that as long as we're in the mind-reading business, I think it is obvious at this point that his failure to clarify or given reasons is deliberate and intentional.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by RadAudit »

I rarely, if ever, differ from Nisi on any financial related question. But, this time, it is worth taking a moment to consider other options.
nisiprius wrote:If Buffett explicitly prefers the S&P 500 over the total market, he could say so.
Why?

Why do we need to know why Mr. Buffet prefers one thing over another? Are individual investors irreparably damaged because of his preference? Even if we all blindly followed Mr. Buffet's personal preferences for the some of the equity holdings in our own portfolios, would we be harmed?

If we are not going to follow his expressed preferences (S&P 500 vs TSM, domestic vs. international, bonds vs CDs, etc.) why do we need know why he chose which investments?

Our job as DIYs is to try to understand why we chose certain investments for our portfolios. If some folks would prefer not to provide access to their reasoning for a stated specific preference, than we can put whatever weight we wish to assign on that recommendation when we choose our investments.

PS: On a personal note, I prefer vanilla ice cream over a vanilla / chocolate / strawberry combination. (And, no I choose not to explain why.)
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by ray333 »

TSM gives you the S/P500+ ... I believe it's slightly more volatile/slightly more potential long term, but could be wrong.

In the end, I don't think it alters your retirement outcome that much. I'm considering keeping my TSM in taxable and S/P in my Roth to avoid any potential wash sale complications while still getting similar growth potential, but may just double dip with TSM. Guess it'd tilt me more to the blue chip/large caps ... but those are the ones most likely to stick around anyway.
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FelixTheCat
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by FelixTheCat »

I've never heard why Buffett prefers S&P 500 over TSM. Maybe he doesn't like small/mid caps?
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JoMoney
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by JoMoney »

FelixTheCat wrote:I've never heard why Buffett prefers S&P 500 over TSM. Maybe he doesn't like small/mid caps?
Depending on how you define what a mid-cap is, there's plenty of them in the S&P500. If you look at the smallest holdings in Vanguard's Mid-Cap Index fund, many of them are constituents of the 500.

A great deal of the advice offered by Buffett is straight out of things written by his mentor Ben Graham, if you accept that, then The Intelligent Investor may provide more background on the advice Buffett reiterates
Benjamin Graham in The Intelligent Investor wrote: ...
In the area of many secondary and third-line common stocks, especially recently floated enterprises, the havoc wrought by the last market break was catastrophic. This was nothing new in itself—it had happened to a similar degree in 1961–62—but there was now a novel element in the fact that some of the investment funds had large commitments in highly speculative and obviously overvalued issues of this type. Evidently it is not only the tyro who needs to be warned that while enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster
...
Note on the Category of “Large, Prominent, and Conservatively Financed Corporations”
The quoted phrase in our caption was used earlier in the chapter to describe the kind of common stocks to which defensive investors should limit their purchases—provided also that they had paid continuous dividends for a considerable number of years. A criterion based on adjectives is always ambiguous. Where is the dividing line for size, for prominence, and for conservatism of financial structure? On the last point we can suggest a specific standard that, though arbitrary, is in line with accepted thinking.
...
The words “large” and “prominent” carry the notion of substantial size combined with a leading position in the industry. Such companies are often referred to as “primary”; all other common stocks are then called “secondary,”
...
We have advised against the purchase at “full prices” of three important categories of securities: (1) foreign bonds, (2) ordinary preferred stocks, and (3) secondary common stocks, including, of course, original offerings of such issues. By “full prices” we mean prices close to par for bonds or preferred stocks, and prices that represent about the fair business value of the enterprise in the case of common stocks. The greater number of defensive investors are to avoid these categories regardless of price; the enterprising investor is to buy them only when obtainable at bargain prices...
...
The most troublesome consequence of our policy of exclusion is in the field of secondary common stocks.
...
There is a paradox here, nevertheless. The average well-selected secondary company may be fully as promising as the average industrial leader. What the smaller concern lacks in inherent stability it may readily make up in superior possibilities of growth. Consequently it may appear illogical to many readers to term “unintelligent” the purchase of such secondary issues at their full “enterprise value.” We think that the strongest logic is that of experience. Financial history says clearly that the investor may expect satisfactory results, on the average, from secondary common stocks only if he buys them for less than their value to a private owner, that is, on a bargain basis.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by nisiprius »

A great deal of the advice offered by Buffett is straight out of things written by his mentor Ben Graham,
Yes, but it doesn't explain why Buffett likes the S&P 500 index, if in fact he does.

Although S&P describes the S&P 500 as being the stocks of "leading companies in leading industries," it is hardly what Graham called "primary companies." My boldfacing. The passages all refer to the "defensive" investor. Some JoMoney has already cited.
The selection of stocks for the portfolio of the defensive investor... we would suggest four rules....

2. Each company selected should be large, prominent, and conservatively financed....
and at the end he explains further:
The words "large" and "prominent" carry the notion of substantial size combined with a leading position in the industry... to be "prominent" a company should rank among the first quarter or first third in size within an industry group.
Let us assume that now, as in the past, the basic policy decision to be made is how to divided the fund between high-grade bonds (or other so-called "cash equivalents") and leading DJIA-type stocks.
...the intriguing question as to why the 30 giants in the DJIA did worse than the much more numerous and apparently rather miscellaneous list used by Standard and Poor's...
In short, to Graham, the S&P 500 was a very broad list, much closer to being the total market than to be a list of "primary companies" whose stock is suitable for "defensive investors."

Not to say anything against what are surely fine companies and probably well known to people in their industry sectors--but are Pulte Homes, Qorvo, Snap-On, and Xylem Inc. truly "primary companies" in Graham's sense?

On a quick peek (complicated by the fact that I'm searching Jason Zweig's annotated edition) I see well over a hundred references to "the DJIA" and "DJIA-type stocks," and only six or so to the S&P 500. (There are dozens and dozens in the "commentary" chapter).
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by JoMoney »

I don't think whether you pick the 500, DJIA, or some other reasonably well diversified low-cost selection of stocks is of critical importence to the strategy... but you have to pick something. Buffett also has repeatedly pointed investor to John Bogle and to his books, and Mr.Bogle likes the Total Market Fund (while not discouraging the original S&P500 index fund as an option either)

FWIW there are other Graham writings that discuss the S&P 500 as a portfolio selection idea here's a Jason Zweig blog with some links/comments:
http://jasonzweig.com/would-benjamin-gr ... dex-funds/
http://jasonzweig.com/another-note-on-b ... dex-funds/
"this should move some of the institutions toward accepting the S&P 500 results as the norm for expectable performance. In turn this might lead to using the S&P 500 or 425 lists as actual portfolios."

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Northern Flicker
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by Northern Flicker »

Warren Buffet said in this interview:
The trick is not to pick the right company, the trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low cost way.
...
you'll do very well with an S&P index.
...
And don't let them talk to you about other index funds…
I think this makes his position clear. Perhaps the data
in this chart is the basis for his position.
Last edited by Northern Flicker on Wed Jul 12, 2017 1:41 pm, edited 2 times in total.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by alex_686 »

I think we are over analyzing this.

The S&P 500 funds is popular. News organizations quote it, there are dozens of funds, almost every 401k has that option. Most people kind of know what it is.

When was the last time you saw a news article referencing The Center for Research in Securities Pricing's U.S. Large Cap Index? Are there any other funds besides Vanguard that uses this index?

Maybe Buffet should be saying "A broad diversified low cost index fund that tracks free float cap weighted US domiciled equities." But that does not roll off of tongue.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by johnubc »

Buffet would like to be a simple man at time. Saying an S&P 500 Fund - implies something that does not need to be defined to most people, i.e., they (think) they know what it is.

Saying - invest in TSM - would require him to define and explain what the TSM is.
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Re: Why Buffet likes S&P 500 Index over a TSM Index Fund?

Post by Northern Flicker »

My point was that in the interview cited he was explicit that his position is not just that it is easier to say the S&P500 or that more listeners will have heard it, but rather that he very specifically recommends the holding of large cap US stocks for equity exposure.
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