Buffett's Latest Thoughts On Indexing

Is Buffett up to no good when he praises indexing?

In his recent letter to shareholders, Warren Buffett said if someone invested $10,000 in an index fund back in 1942, it would be worth $51 million today. For purposes of this post we'll assume he is correct. There were a lot of reactions to this on Twitter. One jokey Tweet said that anyone old enough to have $10,000 back then would be dead by now. Another Tweet jumped on Buffett, saying that if he believed in indexing as he often talks about, then he'd do it. The person said he is not taking the medicine he prescribes. I'm sorry I don't have a link to the Tweet, I just scrolled past it but a couple of hours later I was still thinking about it, I looked but couldn't find it.

I have a different take than the implication that Buffett is talking out of both sides of his mouth. There are many valid ways to successfully invest in the capital markets. If you look you will find books and articles about how to buy stocks that have fallen out of bed be it on bad news or a slow deterioration (Buffett did this with some financials in the fallout from the financial crisis) and on the flip side you can find just as much content about why it makes sense to buy companies breaking out to new highs. Both work at times and both lag at times but more importantly, both are valid long term approaches. I personally don't find doing one exclusively to be optimal. That one person can think they are valid strategies but not necessarily optimal can coexist.

Who in their right mind would say that indexing is not a valid investment strategy? Of course it is valid. That doesn't mean there are not drawbacks, there are. Also, like any other strategy, indexing will at times look pretty good while at other times it will look lousy. I don't believe indexing to be optimal for a long list of reasons I've written about many times over the years but have always said it is valid. Over someone's investing lifetime, assuming an adequate savings rate, a suitable asset allocation and the avoidance of truly stupid behaviors, an indexing strategy has a very high likelihood of growing into a sustainable piece of money for retirement. Buffett himself has had periods where he has lagged and outperformed. For the last two years Berkshire Class B Shares have lagged the S&P 500 but for five years they've outperformed. Yahoo Finance has BRK-B up 64% for the last five years while the S&P 500 is up 49% on a price basis. That 49% is enough to get the job done when looked at for such a small period, it just so happens that Buffett's active strategy did better.

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