It is curious that Warren Buffett, one of the greatest exponents of active management , recommends buying index funds to the S & P500 .
Warren Buffett, known as the Oracle of Omaha, has lived in the same house for more than 60 years. He has breakfast at McDonald’s and loves Coke. It is quite a banner. Respected and flattered by many, he has achieved a 70,000% profitability during the last 40 years.
His business has a trick, but not everyone knows it. The liquidity of the premiums of the insurer it owns gives it a competitive advantage within the reach of very few. So much so, that in 2004 it declared that Berkshire would have half the value, if not for the first insurance company it acquired: National Indemnity. That said, it would still be very daring to detract from Buffett.
In 2000, the investment community, showing off its incessant arrogance, dared to say that it was already pissed off, that not investing in the internet would cost them dearly. In 2008, it happened again. His famous letter in which he declared that he was buying America received much criticism. But once again he overcame the herd. He changed his mind, and in 2016, he bought Apple (25% of his current portfolio). He admits to being wrong with Google and Amazon, but still changes his mind again.
The human being is to stumble twice on the same stone. You will stumble again and they will criticize you again. Meanwhile, many managers buy shares in Berkshire. A kind of indexing to Buffett’s talisman.
Warren Buffett recommends passive management
Thus, despite being one of the last bastions of active management that really makes money for shareholders, Warren Buffett recommends index funds.
In an interview on CNBC, he was asked about his annual meeting with Berkshire Hathaway investors. Logically, investors would ask you about what is happening today: separatist booms, geopolitical tensions, trade wars, military conflicts, unsustainable government debts.
However, in a glimmer of genius, Warren Buffett took them back to their beginnings. Specifically, at the moment of 1942 in which he invested for the first time in a company. Terrible events have happened since then, and yet the American economy (or American business as he likes to call it) has continued to grow. The United States has continued to create wealth, new jobs have been created, new sectors, the internet, mobile phones, computers, very powerful software, wireless headsets, the fall of the Twin Towers and Cuban missiles, among many others. .
There have been many changes and very abrupt, especially for the older generation. And again, against all odds, Warren Buffett indicates that if you had invested $ 10,000 in 1942 in an index fund that reinvested dividends, you would have $ 50 million today.
The stock market is not about to get rich overnight and it does not have to go about racking its brains looking for cheap companies. This is not for 99% of the population. Mainly because you need a lot of time, a lot of knowledge and, the most difficult thing, that you love doing it. However, what it could (and should) be is investing in the world economy and letting evolution continue to do its thing. It won’t make you rich, but it will make you live better than doing nothing.