Buffett and Munger On Index Funds

May 17, 2007 By Jonathan Ping 7 Comments
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Here’s a nice Reuturs article interviewing Warren Buffett and Charlie Munger shortly after the recent Berkshire Hathaway shareholder meeting.

On index funds and beating the market:

Warren Buffett said on Sunday most investors are better off putting their money in low-cost index funds, though he believes he can still outperform major market indexes.

“A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money,” Buffett said at a press conference, a day after the annual shareholder meeting for his Berkshire Hathaway Inc.

As for Berkshire, which ended March with nearly $90 billion of stock and fixed-income investments, Buffett said “we think we can do better than the S&P. I would be disappointed if our portfolio didn’t do a couple of percentage points better. I would be amazed if it did (much) better.”

I’m not sure if this is Buffett being humble, or he is admitting that beating the S&P by a large margin is getting harder and harder.

On performance chasing:

Charlie Munger, Berkshire’s vice chairman, said at the press conference that many investors actually fare worse in actively managed funds. He said many funds perform well when they’re small, but struggle to keep up when investors chase that early performance, and pour in cash.

“Successful funds attract a massive amount of money, and the later performance typically gets mediocre,” he said. “Then they keep publishing returns for the whole period for someone who started 20 years ago…. The reporting has falsehood and folly in it.”

If I believed in the “Buffett way”, which on some days I do, I would simply buy BRK directly rather than try to replicate or beat his results by trading on my own as a mere mortal.

Filed Under: Investing
Last updated: May 17, 2007
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Comments

  1. Rich Minx says
    May 17, 2007 at 4:54 am

    I would love to buy even one BRK share, but I don’t have a spare $3,630 right now…

    Reply
  2. Jonathan says
    May 17, 2007 at 5:43 am

    I have 0.03 shares of BRKB through Sharebuilder from an old bonus. Let’s see where it goes. 🙂

    You should be able to buy it through any broker that allows fractional shares like Sharebuilder, FolioFN, BuyandHold, Sogoinvest if you are willing to pay the associated commissions.

    Reply
  3. Steve Austin says
    May 17, 2007 at 11:59 am

    re: WEB surprise were BRK to do (much) better than a few % pts beyond the S&P 500 index w/ divs, I take him to say that as a $90B outfit he feels the same pain that large mutual funds do.

    Reply
  4. Josh says
    May 17, 2007 at 12:01 pm

    If you don’t have $3600 bucks anywhere to buy a b share of berkshire then you should change your name to poor minx

    Reply
  5. MP says
    May 17, 2007 at 1:36 pm

    I have been looking to invest in index funds for a while but have been hesitant to do so. I would like to invest in a diversification of index funds (S&P 500, Int’l, Energy, etc.) to hedge my investments however I have not made up my mind on which ones. I have been seeing a lot on Vangaurd and Fidelity however I am also looking for the best value with the lowest expense ratio. Please let me know your thoughts/comments. Thanks.

    Reply
  6. Steve Austin says
    May 17, 2007 at 2:17 pm

    MP, you could also investigate good ETFs, by good I mean those that track indexes with low turnover and low fee structures.

    For mutual funds, hard to do better than Vanguard. Also TIAA-CREF if you can get them. I don’t have experience with Fidelity to comment.

    Also have to mention that I am still chuckling about Josh’s comment.

    Reply
  7. Juan De la Vega says
    May 30, 2007 at 1:32 pm

    MP, I am in a similar situation. I liquidated all my individual stock holdings about a month ago – I used to own 22 stocks.
    I want to invest in ETFs but almost all indexes are at an all time high now. I am a value investor and like to buy cheap. But with indexes going up almost every day, my aim of buying cheap remains unfulfilled. What would be a good strategy ? Wait a few months for a market correction? Or just buy value ETFs on a dollar cost average
    basis?

    My tentative plan is to distribute my portfolio among the following sectors:

    Total Stock Market
    Small Cap Value
    Micro Cap
    Emerging Market
    European Market
    Energy
    Cash

    Reply

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