Last weekend tens of thousands of investors swarmed into Omaha, Nebraska for the Berkshire Hathaway annual.
They had good reason to go too.
The value of just one idea, one new and different perspective, or an important lesson can easily be worth the cost of the trip many times over.
The funny thing is, most people who attend will listen attentively, take extensive notes, and, when the markets open on Monday, disregard all the advice they got over the weekend.
A hot IPO or a great story stock will inevitably strike their greed nerve and off they go.
There is, however, one piece of advice offered repeatedly by Buffett I encourage all investors -- especially those are reading this -- to disregard.
Because Buffett himself disregards it.
Buffett’s Big Bet
If you listened to him speak this weekend, you’d think Warren Buffett loves index funds.
He has publicly recommended to his family and most investors should just put money in the S&P 500 index fund.
In 2006 he even famously made a $1 million wager against a hedge fund manager that a basic S&P 500 index fund would beat a basket of hand-picked hedge funds over a decade.
The bet is coming to a close and, through one of the most volatile decades in history, and the index fund is way ahead of the average returns of those hedge funds.
It was a safe bet for Buffett.
Depending on the time frame and structure of the study, anywhere between 80% and 98% of professionally-managed mutual funds and hedge funds fail to beat the S&P 500 each year.
The easy alternative proposed by index funds is compelling:
Step 1: Buy an S&P 500 index fund.
Step 2: Do nothing.
Step 3: Beat 80%-98% of all investors.
Seems like a great deal. For many it is a great deal too. And lot of people have taken the advice.
Index funds have collected $4 trillion in assets. That’s almost one third of the total $13 trillion in U.S. mutual funds.
However, if you’re reading this, you can do much better and you know it...just look at Buffett.
The Harder It Is, The More It’s Worth Doing
If you just think about it, you can beat the S&P 500 if you’re a long-term investor.
Start with the S&P 500.
It’s made up of the 500 largest companies in the world. Every year a few new ones move in and a few drop out.
The world is constantly changing. But there are long-term trends you can ride to boost your returns.
If you look at the Dow Jones Industrial Average 100 years ago, you’ll see companies which have disappeared completely.
Back in 1916, the Dow contained the American Beet Sugar Company, Baldwin Locomotive Works, Central Leather Company, and the American Can Company, the leader in tin can manufacturing.
They’re all gone now. They just weren’t the future at the time.
The same is true today. And if you’re a long-term investor, you can capitalize on that.
If you focus on buying the companies in sectors which have 20 to 30 years growth ahead of them and avoid those looking at structural declines, you can easily beat the major indices.
Think of smart phones vs. hard drives.
One has just started to change the world the other is facing a long march to the technology graveyard.
Buy the former, avoid the latter.
That’s largely what Berkshire Hathaway has done over the decades and the results speak for themselves.