By Lauren Young
New York, March 3 In his most recent Berkshire
Hathaway shareholder letter, the ever-folksy Warren
Buffett sounds more like a personal finance guru than a
financial mastermind, focusing on buy-and-hold investing and
advocating indexing strategies.
Buffett's net worth is about $60 billion, according to
Forbes magazine, so he is obviously doing something right. But
how sound is his advice for the rest of us? ()
I spoke to some financial advisers and pundits, some of whom
are the kind of folks Buffett thinks you should ignore, to get
STAY PASSIVE, KEEP COSTS LOW
What immediately caught my eye is Buffett's instruction that
his wife back up the truck and invest in the Standard & Poor's
500 stock-index upon his death.
That's not a huge surprise, though. Buffett is a longtime
fan of Jack Bogle, founder of the Vanguard Group, who champions
passive, low-cost investing. But this is the first time Buffett
is "putting his money where his mouth is in his own estate,"
Bogle said in a email exchange with Reuters.
Specifically, Buffett wants the trustee of his estate to
put 10 percent of his wife's cash inheritance in short-term
government bonds and 90 percent in a low-cost S&P index fund -
and he tips his hat specifically to Bogle's Vanguard in doing
so. Says Buffett: "I believe the trust's long-term results from
this policy will be superior to those attained by most investors
- whether pension funds, institutions or individuals."
Face value, that's a solid recommendation, although it might
seem a bit odd, considering that Berkshire Hathaway has
underperformed the S&P 500 in the past five years, and is
trailing it slightly in 2014. But that's not surprising because
Buffett tends to lag a bit in bull markets, says Robert
Hagstrom, author of The Warren Buffett Way.
"I had this image of the American flag waving in the
background as I read the letter," said Hagstrom. "He's so
bullish about the U.S., not necessarily about stocks, but about
the country in general."
When it comes to equities, Buffett's recommendation to buy
the S&P 500 is solid, experts say. "The S&P 500 is probably the
best index out there - it's clearly a core holding," says Lou
Kokernak, a financial adviser at Haven Financial Advisers in
However, other advisers say Buffett is endorsing an asset
allocation strategy that's not optimal for most investors.
That's because the S&P 500 is focused on U.S. companies, even if
quite a few have a multinational tilt. "We refer to that as a
home bias, and it's very dangerous," says Randy Kurtz, chief
investment officer at RK Investment Advisors in Kinnelon, New
That is exactly why Paul Jacobs of Palisades Hudson
Financial Group in Atlanta suggests putting as much as 40
percent of Buffett's suggested equity stake in foreign stocks.
Another criticism? Most investors cannot tolerate the risk
of a 90/10 portfolio. "They would be scared out at the bottom
when their $1,000,000 would have turned into $500,000 in 2009,"
says Matthew Chope, a financial adviser at Raymond James in
Southfield, Michigan. "It's as easy as that. We are paid to
manage risk, not just return."
INVESTING VS. SPECULATION
Which brings us to another big Buffett takeaway: invest,
rather than speculate. In his 24-page letter, Buffett uses the
examples of an office building in New York City and a farm he
has visited only twice as investments he has held for the long
haul, through the ups and downs of the market.
A farm and office building might strike some people as odd
investments. Yet they are "classic Buffett" because they get to
the heart of what is plaguing investors, who spend more time
worrying about the price of an asset rather than its intrinsic
value, Hagstrom says. "Investment is focusing on the asset and
what that asset will earn, while speculation focuses on the
price and predicting what the changes in price will be," says
Writes Buffett: "With my two small investments, I thought
only of what the properties would produce and cared not at all
about their daily valuations. Games are won by players who focus
on the playing field - not by those whose eyes are glued to the
That is the key takeaway from Buffett's latest tome to
shareholders, says Josh Brown, chief executive officer of
Ritholtz Wealth Management in New York City and a frequent
pundit. "He invests like an owner and keeps himself aware of his
own weaknesses," Brown says. "He buys companies that he prefers
to own no matter what happens with the macroeconomic picture."
Can investors tune out the incremental ups and downs of the
market? That is a tall order.
But I do love this little nugget from Buffett: "If you can
enjoy Saturdays and Sundays without looking at stock prices,
give it a try on weekdays." I just might try that one.