Set forth below is the text of a comment that I recently put to another blog entry at this site:
Buffett recently wrote that individual investors should “ignore the chatter, keep your costs low” and buy an s&p 500 index fund. In doing so, he added, they would earn returns superior to most investors.
Is it your belief that the world’s fourth richest man (who is in his 80s) does not really believe that, but writes it because he’s scared of what people will write about him on investment forums on the internet?
You’re asking an intelligent question, Curious.
I’ll start by saying what I said in response to a similar question that was asked here re Shiller a day or two ago. You should ask Buffett this question. He is likely to be able to shed more light on it than me. Or, if you are not able to reach Buffett, you should talk it over among your friends. We all would benefit from knowing the answer to your question. I’ll give a shot at providing a reasonable answer. But I am not Superman. I am not the only one capable of thinking over this matter. You should be seeking possible answers from lots of people coming at the matter from lots of different perspectives.
Buffett does not believe in the Efficient Market Theory, which is the intellectual construct on which the Buy-and-Hold strategy was built. He has ridiculed it on numerous occasions. That’s important background in trying to think this through.
I of course agree 100 percent with Buffett re the three points re which you quote Buffett. Yes, investors should ignore the chatter. Yes, investors should keep costs low. Yes, investors should buy a S&P 500 index fund. On all those points there is total and complete agreement.
You don’t quote any words in which Buffett says that investors should ignore valuations in setting their stock allocations. The value proposition offered by stocks changes dramatically with changes in valuation levels. There is 33 years of peer-reviewed academic research showing this beyond any doubt whatsoever.
Buffett himself practices Value Investing. Valuation-Informed Indexing is the indexing strategy that focuses on obtaining strong value propositions (as with Value Investing, but obviously far more simple). So there is zero reason to believe that Buffett does not believe that ordinary investors should not be following Valuation-Informed Indexing strategies and avoiding Buy-and-Hold strategies (in which the value proposition being offered by stocks is ignored when stock purchases are made).
VII is the combination of Buffett’s key insight (an investor must pay attention to the value proposition being obtained) and Bogle’s key insight (investing must be kept simple for the vast majority of investors). I have often observed that Buffett and Bogle go together like chocolate and peanut butter.
All that said, I have not heard Buffett openly criticize Buy-and-Hold, which is an exceedingly dangerous strategy according to the last 33 years of peer-reviewed academic research. Is it possible that he doesn’t see how great the danger of Buy-and-Hold is?
I think it is possible.
I didn’t see the dangers of Buy-and-Hold on the morning of May 13, 2002. John Walter Russell didn’t either. Wade Pfau didn’t see the dangers of Buy-and-Hold when he first began working with me. There are obviously millions of smart and good people who today follow Buy-and-Hold strategies. Those people obviously do not appreciate the dangers of the strategy they follow.
Buffett is obviously smart enough to see these dangers. The problem is that he does not hear other people talking about them and he has no particular reason to explore them himself. Buffett is not a Buy-and-Holder. Buffett is not an indexer. So this is not an area on which he spends a lot of time or mental energy.
The answer, as always, is to launch a national debate on these questions. When there is a national debate, Buffett is one of the people who will be adding his thoughts. A national debate will make him sufficiently informed about the various points that he will be able to offer helpful guidance.
I am certain that Jack Bogle can reach Warren Buffett and that Warren Buffett would be happy to spend some time responding to his inquiries. The sensible thing to do here is to provide a copy of the peer-reviewed research paper that I co-authored with Wade Pfau to Bogle and to ask Bogle to pass it along to Buffett along with a request for his feedback. We all will benefit from hearing what Buffett says about Buy-and-Hold after reading the peer-reviewed research showing that Valuation-Informed Indexing has for 140 years offered far higher returns at dramatically reduced risk.
VII is superior to BH in ever possible way, Curious. Getting Buffett’s feedback on the paper helps us all. If he agrees that VII is far superior, having him say so obviously helps us all by getting the word out to millions of investors who need to know this. If Buffett sees some problem with how the research was done that was not noted by the peer-review committee that approved it, that is obviously something that Wade and I and the peer-review committee need to know.
Are you willing to help bring the matter to Bogle’s attention so that we can get the feedback from Buffett that we all need to hear? I think it would be a truly positive and constructive and life-affirming step for you to agree to help us all (including yourself) out with this important matter.