Buffett betting billions on Index fund investment

• The choice to invest in active or passive funds is one of the top 5 most important investment decisions. The wrong decision on this could end up costing you heavily.
• Buffett’s advice to common investors in his 2004 annual meeting suggested that investing in Index funds over 10 years would enable most people to be ahead of 90% of all investors
• Buffett has instructed that his estate worth billions of dollars should be invested in one Index fund
• Buffett won a million dollar bet with a hedge fund that the S&P 500 Index would beat the hedge fund over a ten year period
• India’s Employee Provident Fund Organization has invested Rs. 1.57 lakh crores in the stock market and all of that is in Index funds

So you’ve calculated the final value of investments you need in order to retire in the year you plan to retire. You then need to decide what percentage of your investments need to be in equity vs debt. Refer to this fantastic article here to learn how to decide your asset allocation

Based on that you have arrived at a monthly SIP amount that you need to invest in equity as well.

Now the next question that arises is WHERE or what type of Mutual Fund to invest that monthly SIP in. And the first and most critical decision you need to take is whether to invest in an actively managed fund or a passive Index fund.

Most people debating the topic provide data on active vs passive funds. And, given the time period one chooses, one can always find data to support both camps. If you take that approach, the debate on active vs passive Index funds which has raged for decades will probably continue for many decades to come.

So in the next few articles on the topic of Index funds vs Active funds I won’t be focusing that much on data to prove a point. (although I will share some data points for what it’s worth) Rather, I will provide some insights into things like what Warren Buffett thinks about investing in Index funds and I will talk about the philosophy as well as what sort of temperament or attitude you need to have if you decide to invest in passive Index funds. See if you resonate with this. If you do resonate, then pick Index funds. If you don’t, you’re free to choose actively managed mutual funds. As with everything in personal finance and investing …. It’s your money so it’s your final decision on where you want to invest it. But I do feel that you owe it to yourself to become educated about the choices and option of Index funds and then carefully make a well thought through decision.

It’s important to understand that the choice you make to invest in active or Index funds is, in my opinion, one of the top 3 to 5 most critical investment decisions you will make about your investments. My guesstimate is that a wrong decision here could end up costing you tens of lakhs over a 10 to 20 year period of investing if not more. So think through this one really carefully before making a decision.

In this initial article on the topic of active vs passive funds, I refer to 3 points that Warren Buffet has made about the best way for the common man to invest in the stock market. I also refer to how much India’s Employee Provident Fund Organization has invested in Index funds.

Buffett said at the 2004 Berkshire Hathaway annual meeting. “If you invested in a very low-cost index fund — where you don’t put the money in at one time, but average in over 10 years — you’ll do better than 90% of people who start investing at the same time,”

Here’s a link to the video of him saying these words at his 2004 annual Berkshire shareholder meeting: https://buffett.cnbc.com/video/2004/05/01/berkshire-stock-vs-index-fund.html

Buffett doesn’t just advise people to invest in Index funds, he is following his own advice too with the estate he will leave his wife !

He has directed that 90% of what’s remaining after his lifetime should be invested for his wife in just one Index fund, the S&P 500 Index fund. More on that here and here in this CNN Article

Here’s what he actually wrote on this in his Berkshire Hathaway shareholder letter 2013: “My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) 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 – who employ high-fee managers.”

If Buffett does that with his own money worth billions of dollars, I can’t help but think that it must be a very wise way to invest one’s money.

But that’s not all. In 2007 Buffett put out a challenge for hedge fund managers to beat the S&P 500 Index fund over a ten year period. Hedge fund firm Protégé Partners came forward and put a million dollars on the line in 2007. Buffett won the bet and by quite a margin as you can see in the chart below.

Lastly, here’s another fact you should know about. Your employee Provident Fund is also being invested in Index funds !

When the EPFO in India invests a portion of your provident fund into equity, they invest all of the equity portion only into Index funds. The amount it has invested is something like Rs. 1.57 lakh crores: Not a small sum by any standards.

So let’s put this into perspective. Making investment decisions for something as significant as a provident fund for millions of employees is a huge responsibility for the EPFO to shoulder. And if they think investing in Index funds is a wise and safe thing to do, I can’t help but think it’s wise and safe for us as well.

The choice to invest in active or passive funds is one of the top 5 most important investment decisions. The wrong decision on this could end up costing you heavily. Data at any point in time will always show that some active funds have beaten the Index but in my view, investing in Index funds is more of a philosophy and you have to see whether that philosophy fits your temperament or values better than active funds. I will talk more about the philosophy and temperament in future articles. Buffett thinks that those that invest in index funds will beat 90% of investors. He has directed in his will that 90% of the estate his wife inherits should be put into just one Index fund, the S&P 500. Last but not least, he won a million-dollar bet against a hedge fund that the S&P 500 would beat any hedge fund over a 10 year period and he won. Finally, a highly responsible organization like the Employee Provident Fund of India (EPFO), that has to invest money very wisely to be able to make good on it’s PF payout commitments to millions of people, has also invested 1.57 lakh crores in the stock market and all of it is in Index funds.