Warren Buffett, Investing, and You.


Warren Buffett is the most successful Wall Street investor of all time. His ability to forecast the market is unmatched. If there were anyone whose advice you’d want to trust on investing, it would be Warren Buffett. He’s got the record to prove it. His wealth stretches to nearly $100 billion.

So pardon me for saying this: you’re a sucker if you take his advice.

Most Americans – nearly 52% – do not own stocks, period. Of those who do invest, an even smaller minority qualify as “active investors”, who buy and sell stocks based on some kind of strategy. Many Americans are passive investors, meaning that they buy and hold with no intent to sell in the short tor mid-term.

Some people can make a lot of money from active investing. If that’s something you’re good at, great. Go for it. But most people do not actively invest. Quite frankly, it’s for their own good. Most passive investors would probably lose all their money if they tried their hand at active investing. Active investing, beyond a measure of good luck, requires an ability to assess business prospects and forecast market conditions.

Fortunately for passive investors, they have the Oracle of Omaha on their side. Warren Buffett offers this advice to passive investors:

Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.

I have good news for these non-professionals: The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.

That’s the “what” of investing for the non-professional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’ observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long term results than the knowledgeable professional who is blind to even a single weakness.

Warren Buffett advises the non-professional and passive investors to buy and hold a no-load S&P 500 index fund. Not buying and selling through an ETF, mind you; buy and hold. Set it and forget it.

His advice stinks. Let me explain.

On March 24th, 2000, the S&P closed at 1527. This was the all-time high up to that point. The market crashed soon afterward.

Let’s run that number against the Bureau of Labor Statistics’ inflation calculator. Type in 1527, and change the year to 2000. Select “calculate”. The number you will see is this: 2081. This number indicates where the S&P should be at today in order to make up for price inflation over the past 15 years.

What is the S&P 500 at today? 2091. Just about breaking even.

Unfortunately, it’s not really breaking even. Investors have to pay a 23.8% capital gains tax on increases above 1527. Any investors who bought and held a no-load S&P 500 index fund on March 10th, 2000, have lost 23.8% on their profits.

What does this mean? For those investors who have held a no-load S&P 500 index fund since March 24th, 2000, there have been no profits. They’ve lost money. Dividends were low: from 2000 to 2014, around 2%. Then they’re taxed as income. These investors paid taxes all the way down.

Conclusion: following Buffett’s advice has been a rotten decision.

The question is, rotten from who’s perspective? In all actuality, this advice has been great for Buffet. If passive investors pile into the S&P 500 and hold, it puts a floor under stock prices. It protects his money. It protects his clients’ money. But Mom and Pop investors have been hosed all the way down.

Avoid buying and holding S&P index funds. For the past 15 years, the S&P 500 has been a loser’s game.

Conversely, the price of an ounce of gold was $275 in March of 2000. Punch that into the BLS inflation calculator. We get $374. Adjusted for inflation, gold would need to be at $374 per ounce today in order to have broken even over the past 15 years.

Where is gold today? Nearly $1200 per ounce. It went as high as $1900 in 2011. If an investor had put their money into gold instead of an S&P 500 index fund, they’d have far more money today. Lots more.

Alternatively, what if an investor had cashed out of the S&P in early March of 2000 and put his money into income-producing real estate instead? If that investor bought wisely in decent locations, they’ve made more money. Lots more. Even further, they now have a steady income stream.

If you took Buffett’s advice over the past 15 years, you blew it. “But things are different now,” some might claim, “we’re in a bull market!” People said the same thing in 1999. They said the same thing in 2007. A lot of people nestled into the stock market’s green bosom and fell asleep. They woke up naked and alone in a strange alleyway behind the NYSE with little to nothing left. If the S&P has made you money over the past few years, great; but is that going to continue? Are you going to cash out before the market busts? Or are you going to take Buffett’s advice and do nothing? Maybe cross your fingers and hope for the best?

Don’t cross your fingers and hope for the best. Make better decisions instead.

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