Buffett believes investors don’t need to do extraordinary things to get great results.
Warren Buffett is well known for being perhaps the greatest stock picker of all time, and for good reasons. Berkshire Hathaway (BRK.A -0.88%) (BRK.B -0.97%), the conglomerate Buffett has led since the mid-1960s, has delivered unbelievable returns for investors over the years, and a big reason is Buffett’s success with using Berkshire’s capital to invest in stocks.
What makes Buffett’s investing style so extraordinary is how simple it is. Buffett invests in great businesses (mostly ‘boring’ ones) that he believes trade for significantly less than their intrinsic value and holds them for as long as they remain great businesses.
He doesn’t chase technology stocks or try to get in on the ground floor of the ‘next big thing.’ He doesn’t trade short-term. And he uses fairly basic investment principles, which he often shares with everyday investors. In addition to being the most successful investor, he is also the most quotable.
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Buffett’s advice to the average investor
Yes, Warren Buffett has an extraordinary track record when it comes to choosing individual stocks to invest in. But it’s also important to know that he spends many hours (usually over 10 per day) researching and reading.
Of course, you don’t need to spend that much time, but the point is that being a successful individual stock investor requires time and knowledge. As Buffett says, “If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.”
To be perfectly clear, Buffett doesn’t think there’s anything wrong with this option. In fact, he has directed that his own wife’s inheritance be invested in this way after he’s gone.
Buffett has specifically mentioned the S&P 500 as a great way to bet on American business. And he says that “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead.”
Buffett is a big fan of this S&P 500 ETF
There are several excellent S&P 500 index funds in the market, but one that Buffett has owned in Berkshire Hathaway’s portfolio is the Vanguard S&P 500 ETF (VOO -1.43%). This fund simply tracks the 500 stocks in the index, in their respective weights, and should mimic the performance of the benchmark index over time.
Buffett is a big fan of Vanguard, which pioneered the low-cost index fund years ago. The Vanguard S&P 500 ETF has a rock-bottom 0.03% expense ratio, which means that you’ll pay just $0.30 in annual investment fees for every $1,000 in assets. To be clear, this isn’t a fee you physically have to pay — it will just be reflected in the fund’s performance over time. But it’s so low that it will barely have any impact on your long-term results.
You might be surprised at the potential
One final Buffett quote I’ll leave you with is “it isn’t necessary to do extraordinary things to get extraordinary results.” And it certainly applies to index fund investing.
Over the long run, the S&P 500 has produced annualized returns of about 10% over long periods of time. Let’s say that you invest just $200 per month in the Vanguard S&P 500 ETF and that you achieve 10% returns going forward.
- In 10 years, you’d have about $38,250.
- In 20 years, you’d have $137,460.
- In 30 years, you’d have nearly $395,000.
- In 40 years, you’d have about $1.06 million.
The key is to invest consistently and hold for a long time. The magic of long-term compounding will do the heavy lifting for you. As you can see, if you’re not comfortable with picking individual stocks, it doesn’t necessarily mean that you can’t use the stock market to build extraordinary wealth over time.
Matt Frankel has positions in Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
