David Gardner: Should you invest like Warren Buffett?

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You almost need to feel sorry for active investors. These are people who believe they can beat the market with their individual stock picks. This includes your friend at work who jumped on board the NVIDIA train before anyone else, but also institutional investors running mutual funds that attempt to outperform the relevant stock market index.

David Gardner /For the Camera

The S&P SPIVA report every year computes the percentage of funds that beat their relevant indexes, and almost every year most actively managed funds perform worse than a passive index. Last year 60 percent of large-cap actively managed funds didn’t keep up with the S&P 500. The longer the time period we consider, the worse the results for active managers get. Looking at the last 20-year period close to 93% of actively managed large-cap mutual funds underperformed the S&P 500.

We’ve considered the consistent underperformance of actively managed funds before. Say you agree with the overwhelming evidence that most active managers cannot keep up with the performance of a relevant index. But instead of settling for an index fund or ETF, you instead pivot and look for the best actively managed fund. There must be a manager out there who can be exceptional consistently?

Perhaps the most celebrated active investor is Warren Buffett, CEO and chairman of Berkshire Hathaway. Called the Oracle of Omaha, Buffett is known for his investment acumen over many decades and has been the target of countless biographies attesting to his exceptional track record as well as his charming quirks such as his daily drive-through window visit to McDonalds, behavior unexpected for one of the richest people in the world.

His advantages go far beyond those of most active managers. Berkshire is a conglomerate that owns many individual companies such as GEICO and See’s Candies, while also holding sizable stakes in individual stocks such as Apple. Buffett is not a traditional active fund manager as he can offer his connections and operational expertise to Berkshire’s portfolio companies. If Warren’s on the phone, you’ll take the call.

Now 93 years old, Buffett has had incredible longevity as a CEO and investment manager. But has it paid to invest in Berkshire Hathaway in recent years? Let’s take a look. As of the end of June, Berkshire has returned 18.2% in the last year, according to Morningstar data. While that’s stellar performance when considered in a vacuum, it falls short of the Vanguard 500 Index Fund Admiral that earned 24.5%.

Even the best investors can have a poor year. What about over longer periods? The three-year period boasted strong performance of Berkshire with an increase of 45.4% over that period versus 32.3% for Vanguard’s 500. On the other hand, over both five-year and 10-year periods the Vanguard fund pulls ahead. The 20-year period similarly shows the Vanguard 500 Fund has outperformed Buffett’s Berkshire Hathaway.

If you’re still reading after wading through all these statistics, consider this incredible point. Perhaps the best-known active investor has failed to top the performance of the S&P 500 under many historical periods including the last 20 years. If we continue to look beyond this period, we will find times when Buffett has trounced the indexes. But 20 years is a long time of relative underperformance.

A final point to consider is Buffett’s recommended investment strategy for his wife should she survive him. He reportedly has advised that she invest 10% of her portfolio in short-term Treasury bonds and the remainder in an S&P 500 fund. Perhaps we should follow what Buffett says and not what he does. After all, evidence shows that active investors have the deck stacked against them, even when you’re the Oracle.


David Gardner is a Certified Financial Planner™ professional at Mercer Advisors practicing in Boulder County. Opinions expressed by the author are his own and are not intended to serve as specific financial, accounting, or tax advice. They reflect the judgment of the author as of the date of publication and are subject to change. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. The hypothetical examples above are for illustration purposes only. Actual investor results will vary. Every individual’s situation is unique, and you should consider your investment goals, risk tolerance, and time horizon before making any investment decisions. For financial planning advice specific to your circumstances, talk to a qualified professional. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.