Warren Buffett on Index Funds

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Howard Donnelly
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Warren Buffett on Index Funds

Post by Howard Donnelly » Sat Dec 18, 2010 1:10 am

"A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth." - Warren Buffett

Does anyone have information on Warren Buffett and his personal relationship with Jack Bogle? Are they friends?

afan
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Post by afan » Sat Dec 18, 2010 10:31 am

Didn't Graham die around the time the first index funds were created? How could he have an opinion on their actual performance? Did he mean "If they existed, low cost index funds would be the most sensible investment"?

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Post by Bylo Selhi » Sat Dec 18, 2010 11:11 am

afan wrote:Didn't Graham die around the time the first index funds were created? How could he have an opinion on their actual performance?
Here's what he actually said shortly before he died in 1976: A Conversation With Benjamin Graham

As for Buffett, here are some more indexing quotes:
Most investors ... will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals. [From 1996 Letter to shareholders]
By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when "dumb" money acknowledges its limitations, it ceases to be dumb. [From 1993 Letter to shareholders]

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Buffett

Post by Mazz » Sat Dec 18, 2010 12:00 pm

Buffett didn't become a billionaire by investing in index funds.
In fact, Buffett didn't become a billionaire by being a stock picker.
He became a billionaire because he owns an insurance company.

The key to his comment is "For a great majority of investors".
He didn't say "For All investors".

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Re: Buffett

Post by riskreward » Sat Dec 18, 2010 1:45 pm

Mazz wrote:Buffett didn't become a billionaire by investing in index funds.
In fact, Buffett didn't become a billionaire by being a stock picker.
He became a billionaire because he owns an insurance company.

The key to his comment is "For a great majority of investors".
He didn't say "For All investors".
Right, except for him. He is the outlier. He has said many times that he has a gift for capital allocation. He will pore over 10k's and knows a company's balance sheet inside out.

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rustymutt
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Post by rustymutt » Sat Dec 18, 2010 1:49 pm

Warren Buffett is a want to be. Wealth don't mean crap. He got very lucky with an insurance company; Which by the way I can't stand insurance companies. He's a business man who turned to Wall Street for more revenues.
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Want to be?

Post by Nowizard » Sat Dec 18, 2010 1:53 pm

What does that mean? He is different from most of us on this forum in approach and result. Arguably, he is not only one of the greatest investors of all time but one of the greatest philanthropists.
As Taylor says, there is more than one path to Dublin.
Tim

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Re: Want to be?

Post by rustymutt » Sat Dec 18, 2010 1:59 pm

Nowizard wrote:What does that mean? He is different from most of us on this forum in approach and result. Arguably, he is not only one of the greatest investors of all time but one of the greatest philanthropists.
As Taylor says, there is more than one path to Dublin.
Tim
It means wealth don't mean a thing to me. I don't respect people because of their wealth. He may, or may not be a good man.
I'm not a respecter of people, because of who they happen to be.
Now it may well be that he's a good man, I don't know him.
I'm amazed at the wealth of Knowledge others gather, and share over a lifetime of learning. The mind is truly unique. It's nice when we use it!

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Post by Alex Frakt » Sat Dec 18, 2010 2:02 pm

Bylo Selhi wrote:
afan wrote:Didn't Graham die around the time the first index funds were created? How could he have an opinion on their actual performance?
Here's what he actually said shortly before he died in 1976: A Conversation With Benjamin Graham
That is a great link. Based on this, I'd say there is a great deal of similarity between Graham and Bogle's views on Wall Street and on individual investing. Bogle even used the same Shakespeare line when talking about Wall Street activities at Bogleheads 9.
What is your view of Wall Street as a financial institution?

Graham: A highly unfavorable--even a cynical--one. The Stock Exchanges appear to me chiefly as a John Bunyan type of Vanity Fair, or a Falstaffian joke, that frequently degenerates into a madhouse--"a tale full of sound and fury, signifying nothing." The stock market resembles a huge laundry in which institutions take in large blocks of each other's washing--nowadays to the tune of 30 million shares a day--without true rhyme or reason. But technologically it is remarkably well-organized.
What are the reproduction rights on the page, could we repost it on this site?

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Re: Want to be?

Post by jmourik » Sat Dec 18, 2010 2:06 pm

rustymutt wrote: It means wealth don't mean a thing to me. I don't respect people because of their wealth.
Very true. Wealthy doesn't mean good. Poor doesn't mean bad.

This is a respectable thing though: http://givingpledge.org/

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Re: Want to be?

Post by Beagler » Sat Dec 18, 2010 2:07 pm

rustymutt wrote:
Nowizard wrote:What does that mean? He is different from most of us on this forum in approach and result. Arguably, he is not only one of the greatest investors of all time but one of the greatest philanthropists.
As Taylor says, there is more than one path to Dublin.
Tim
It means wealth don't mean a thing to me.
Odd that you're approaching 1,000 posts on a site devoted to investing.

Mr. Buffett has bequeathed the majority of his fortune to charity, so a lot worse use could come from his wealth.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

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Post by Bylo Selhi » Sat Dec 18, 2010 2:29 pm

Alex Frakt wrote:What are the reproduction rights on the page, could we repost it on this site?
Technically it's copyrighted by CFA Institute. I put it on my page originally because at the time it wasn't available online. Someone had sent me a copy by e-mail. I wanted to make it available more widely for educational purposes, as well as to settle arguments about what Graham had actually said. These days it's widely available on the 'Net to anyone who Googles the title, e.g. here [PDF.]

BTW I find the snippets at the end of my page, taken from the 1951 3rd ed. of Security Analysis, eerily similar to a certain senior thesis from the same time period ;)

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Post by nbatt » Sat Dec 18, 2010 2:29 pm

In the following book there are several conversations with Graham similar to this one.

Benjamin Graham: Building a Profession
Classic Writings of the Father of Security Analysis
by Jason Zweig
McGraw-Hill

Graham had just about given up on recomending stock picking stratagies for individual investors by the end of his career and instead recomends index funds, even though he mentions some very sucessull stock picking stategies in the book I mention above. This recent book the Zweig was put out to correspond with the most recent version of Security Analysis and is a very Bogle'ish book. It is worthy of having excerpts as part of the wiki investment jems on this website.

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Re: Buffett

Post by pkcrafter » Sat Dec 18, 2010 2:46 pm

Mazz wrote:Buffett didn't become a billionaire by investing in index funds.
In fact, Buffett didn't become a billionaire by being a stock picker.
He became a billionaire because he owns an insurance company.

The key to his comment is "For a great majority of investors".
He didn't say "For All investors".
No, he didn't say all investors. The big problem is anyone who chooses to use anything but index funds either does not know anything about index funds or they are certain they can outperform at least half of all other investors. Obviously at least half of all active investors who firmly believe this will be wrong. Furthermore, they are unable to recognize it or admit it.

Want to be like Warren Buffett? Buffett started by reading all 10,000 pages of Moody's Stock Manuals twice.

I like these excerpts from the Ben Graham interview....
Can the average manager of institutional funds obtain better results than the Dow Jones Industrial Average or the Standard & Poor's Index over the years?

No. In effect, that would mean that the stock market experts as a whole could beat themselves--a logical contradiction.

Simple logic that does not rely on an efficient market.
Do you think, therefore, that the average institutional client should be content with the DJIA results or the equivalent?

Yes. Not only that, but I think they should require approximately such results over, say, a moving five-year average period as a condition for paying standard management fees to advisors and the like.
In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?

In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost.


The research today is even more intense and complete.



Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Buffett

Post by pkcrafter » Sat Dec 18, 2010 2:47 pm

[duplicate]
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Praise from Warren Buffett

Post by Taylor Larimore » Sat Dec 18, 2010 2:51 pm

Hi Howard:
Does anyone have information on Warren Buffett and his personal relationship with Jack Bogle?
Mr. Buffett gave this endorsement to Mr. Bogle's The Little Book of Common Sense Investing.:
"A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth."
"Simplicity is the master key to financial success." -- Jack Bogle

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Post by Alex Frakt » Sat Dec 18, 2010 3:03 pm

Bylo Selhi wrote:
Alex Frakt wrote:What are the reproduction rights on the page, could we repost it on this site?
Technically it's copyrighted by CFA Institute. I put it on my page originally because at the time it wasn't available online. Someone had sent me a copy by e-mail. I wanted to make it available more widely for educational purposes, as well as to settle arguments about what Graham had actually said. These days it's widely available on the 'Net to anyone who Googles the title, e.g. here [PDF.]
I just sent a message to Charles Ellis to see if he could give me permission. Based on the header comment in the FA Journal, it looks like he would be the real owner of the copyright of the conversation (FA Journal would own the copyright to their format only).
Bylo Selhi wrote:BTW I find the snippets at the end of my page, taken from the 1951 3rd ed. of Security Analysis, eerily similar to a certain senior thesis from the same time period ;)
As would be expected from such an inescapable conclusion :-)

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Post by baw703916 » Sat Dec 18, 2010 3:03 pm

To paraphrase a quote I read a few years ago, if you look in the mirror and don't see Warren Buffett, indexing is likely to be the best strategy.

Brad
Most of my posts assume no behavioral errors.

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Post by Howard Donnelly » Sat Dec 18, 2010 3:11 pm

baw703916 wrote:To paraphrase a quote I read a few years ago, if you look in the mirror and don't see Warren Buffett, indexing is likely to be the best strategy.
Brad,

That is funny! And good advice too.

Thanks,
Howard

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Re: Want to be?

Post by simplesimon » Sat Dec 18, 2010 5:04 pm

rustymutt wrote:Now it may well be that he's a good man, I don't know him.
Yet you called him a wannabe. What?

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Post by dharrythomas » Sat Dec 18, 2010 5:57 pm

Buffett was and always has been a stock picker. He's picked some winners and some losers but his overall record is unmatched since he left NY and moved back to Omaha after Ben Graham retired. He bought his insurance companies with money he made investing.

You can abuse him all you want but he is the premier stockpicker of his time.

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Post by chaz » Sat Dec 18, 2010 6:47 pm

dharrythomas wrote:Buffett was and always has been a stock picker. He's picked some winners and some losers but his overall record is unmatched since he left NY and moved back to Omaha after Ben Graham retired. He bought his insurance companies with money he made investing.

You can abuse him all you want but he is the premier stockpicker of his time.
He (Warren Buffett) is a smart guy.
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Re: Want to be?

Post by davidepope » Sat Dec 18, 2010 7:56 pm

Beagler wrote:Mr. Buffett has bequeathed the majority of his fortune to charity, so a lot worse use could come from his wealth.
Thanks for the above link; I had never read the actual text of his pledge...
"In 2006, I made a commitment to gradually give all of my Berkshire Hathaway stock to philanthropic foundations. I couldn't be happier with that decision.

Now, Bill and Melinda Gates and I are asking hundreds of rich Americans to pledge at least 50% of their wealth to charity. So I think it is fitting that I reiterate my intentions and explain the thinking that lies behind them.

First, my pledge: More than 99% of my wealth will go to philanthropy during my lifetime or at death. Measured by dollars, this commitment is large. In a comparative sense, though, many individuals give more to others every day.

Millions of people who regularly contribute to churches, schools, and other organizations thereby relinquish the use of funds that would otherwise benefit their own families. The dollars these people drop into a collection plate or give to United Way mean forgone movies, dinners out, or other personal pleasures. In contrast, my family and I will give up nothing we need or want by fulfilling this 99% pledge.

Moreover, this pledge does not leave me contributing the most precious asset, which is time. Many people, including -- I'm proud to say -- my three children, give extensively of their own time and talents to help others. Gifts of this kind often prove far more valuable than money. A struggling child, befriended and nurtured by a caring mentor, receives a gift whose value far exceeds what can be bestowed by a check. My sister, Doris, extends significant person-to-person help daily. I've done little of this.

What I can do, however, is to take a pile of Berkshire Hathaway stock certificates -- "claim checks" that when converted to cash can command far-ranging resources -- and commit them to benefit others who, through the luck of the draw, have received the short straws in life. To date about 20% of my shares have been distributed (including shares given by my late wife, Susan Buffett). I will continue to annually distribute about 4% of the shares I retain. At the latest, the proceeds from all of my Berkshire shares will be expended for philanthropic purposes by 10 years after my estate is settled. Nothing will go to endowments; I want the money spent on current needs.

This pledge will leave my lifestyle untouched and that of my children as well. They have already received significant sums for their personal use and will receive more in the future. They live comfortable and productive lives. And I will continue to live in a manner that gives me everything that I could possibly want in life.

Some material things make my life more enjoyable; many, however, would not. I like having an expensive private plane, but owning a half-dozen homes would be a burden. Too often, a vast collection of possessions ends up possessing its owner. The asset I most value, aside from health, is interesting, diverse, and long-standing friends.

My wealth has come from a combination of living in America, some lucky genes, and compound interest. Both my children and I won what I call the ovarian lottery. (For starters, the odds against my 1930 birth taking place in the U.S. were at least 30 to 1. My being male and white also removed huge obstacles that a majority of Americans then faced.) My luck was accentuated by my living in a market system that sometimes produces distorted results, though overall it serves our country well. I've worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions. In short, fate's distribution of long straws is wildly capricious.

The reaction of my family and me to our extraordinary good fortune is not guilt, but rather gratitude. Were we to use more than 1% of my claim checks on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others. That reality sets an obvious course for me and my family: Keep all we can conceivably need and distribute the rest to society, for its needs. My pledge starts us down that course."

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Mr. Buffett's "Giving Pledge"

Post by Taylor Larimore » Sat Dec 18, 2010 8:11 pm

Bogleheads:

I have long been an admirer of Warren Buffett. His "Giving Pledge" strengthens my belief.

Thank you, Mr. Buffett.
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Want to be?

Post by rustymutt » Sat Dec 18, 2010 8:34 pm

simplesimon wrote:
rustymutt wrote:Now it may well be that he's a good man, I don't know him.
Yet you called him a wannabe. What?
A want be buy and holder.
I'm amazed at the wealth of Knowledge others gather, and share over a lifetime of learning. The mind is truly unique. It's nice when we use it!

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Re: Mr. Buffett's "Giving Pledge"

Post by wander » Sat Dec 18, 2010 9:32 pm

Taylor Larimore wrote:Bogleheads:

I have long been an admirer of Warren Buffett. His "Giving Pledge" strengthens my belief.

Thank you, Mr. Buffett.
99% of his money is for charity. He is making sure the IRS cannot touch his money.

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Post by rustymutt » Sun Dec 19, 2010 4:13 pm

He's a very intelligent man, there is no doubt about this.
I'm amazed at the wealth of Knowledge others gather, and share over a lifetime of learning. The mind is truly unique. It's nice when we use it!

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Re: Mr. Buffett's "Giving Pledge"

Post by ann_l » Mon Dec 20, 2010 1:00 pm

wander wrote:
Taylor Larimore wrote:Bogleheads:

I have long been an admirer of Warren Buffett. His "Giving Pledge" strengthens my belief.

Thank you, Mr. Buffett.
99% of his money is for charity. He is making sure the IRS cannot touch his money.
He's a lot less concerned about the IRS getting his money than most; he's a strong advocate for higher taxes for the rich, often saying his secretary pays a higher percentage in taxes than he does.

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Post by KyleAAA » Mon Dec 20, 2010 1:12 pm

These three quotes say it all:


Can the average manager of institutional funds obtain better results than the Dow Jones Industrial Average or the Standard & Poor's Index over the years?

No. In effect, that would mean that the stock market experts as a whole could beat themselves--a logical contradiction.

Do you think, therefore, that the average institutional client should be content with the DJIA results or the equivalent?

Yes. Not only that, but I think they should require approximately such results over, say, a moving five-year average period as a condition for paying standard management fees to advisors and the like.

In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?

In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.

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Re: Want to be?

Post by Beantown85 » Mon Dec 20, 2010 1:18 pm

rustymutt wrote:
simplesimon wrote:
rustymutt wrote:Now it may well be that he's a good man, I don't know him.
Yet you called him a wannabe. What?
A want be buy and holder.
LOL. I'm sure his inability to be a "buy and holder" is keeping him up at night. Classic.

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Post by Shireman28 » Mon Dec 20, 2010 1:29 pm

How is Buffett's bet of Index Funds against the Hedge Fund guys going?

(It would be hilarious if the Hedgies had a Madoff fund in their basket of Hedge Funds)

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Post by FredPeterson » Mon Dec 20, 2010 1:37 pm

Shireman28 wrote:How is Buffett's bet of Index Funds against the Hedge Fund guys going?

(It would be hilarious if the Hedgies had a Madoff fund in their basket of Hedge Funds)
http://money.cnn.com/2010/04/27/news/co ... /index.htm Most recent I could find. Didn't look terribly hard though.
outdid the average performance of the five funds of funds that New York-based money management firm Protégé backs, 26.2% to 15.9%.

But Buffett's spurt was not enough to undo the lead that Protégé's funds had racked up in the turbulent year of 2008. True, the standings for the two years combined show both contenders having lost money. But Protégé's picks are down 11.8%, less than the S & P's minus 20.2%.
This is I did not know:
The precise index fund "bought" by Buffett is Vanguard's S&P 500 Admiral fund (VFIAX).

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Re: Want to be?

Post by scouter » Mon Dec 20, 2010 7:12 pm

rustymutt wrote:
Nowizard wrote:What does that mean? He is different from most of us on this forum in approach and result. Arguably, he is not only one of the greatest investors of all time but one of the greatest philanthropists.
As Taylor says, there is more than one path to Dublin.
Tim
It means wealth don't mean a thing to me. I don't respect people because of their wealth. He may, or may not be a good man.
I'm not a respecter of people, because of who they happen to be.
Now it may well be that he's a good man, I don't know him.
Well, I don't know him personally, but his charitable contributions will make more of a difference in this world than anything I can ever do, or for that matter, all of us on this forum combined. (unless Bill Gates is lurking here)

That alone wins my admiration.

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