If I were to make a list of celebrity best friends I would love to have (after Oprah obviously), Warren Buffet would definitely make the cut. If you don’t know who he is, he’s this crazy smart investor who happens to be worth $143 BILLION. But that’s not what makes him so delightful.
He is a super simple, down to earth guy, who lives in Nebraska in a home he bought for less than $200K like 40 years ago. He is known for his love of McDonald’s and Diet Coke, and says just because something is expensive, that doesn’t equal the joy it brings you. He drives a Taurus because he likes it. You can see why he is fabulous.
The $1 MLLION CHALLENGE
In 2008, Warren Buffet issued a challenge to hedge fund money managers (you know, the people who get paid serious bank to invest other people’s $$$ with the hopes they can make crazy high returns). Anyone that can beat his VERY SIMPLE recommendation, would make $1M. His bet was that all their fancy picks with their fancy costs, will not outperform the S&P 500. And guess what? He was right. And won.** (If you don’t know what the S&P 500 is, it’s 500 of the largest publicly traded companies in the US. Essentially, he was saying no matter what you pick, it’s not going to do better than the combined strength, and also diversification of the top 500 companies).
WHAT IS HIS #1 RECOMMENDATION FOR INVESTING?
Index Funds in the S&P 500. Buffet invested in a Vanguard fund (VFIAX) which has a cost of .04% and delivered a return of 125% over 10 years. During the same period, the funds he beat, ranged from 2.8%-87.7%.
Warren has said repeatedly, that the single thing people can invest in is low-cost index funds in the S&P 500. Why does that matter? If you invest in a low-cost index funds, the fees you pay could be around the .04% level (similar to the fund I just used as an example). If you have $100,000 invested, that’s $40 in fees per year. Many money managers typically take 1%. If you go with the money manager @ 1% that $40 fee becomes $1,000. And you pay that every year! It’s a HUGE difference that can really add up and affect your long-term earnings.
IF YOU HAVE $$$ YOU WANT TO INVEST:
*Try investing in index funds (index funds are a type of mutual funds-essentially you are investing in a group of stocks versus just one, which mitigates risk). Personally, I never invest anymore in single stocks. I made one smart move (Boeing after 9/11), and the rest not as smart. Individual stocks are much harder to consistently deliver high returns. It’s like putting all your eggs in one basket, versus mitigating risk and spreading it out.
*I love Vanguard (my first choice) and Fidelity (second choice). I use them both personally and have for over 20 years. Even if you have zero money invested right now, you can go to vanguard.com, search mutual funds, and sort by index. You can then see tons of funds listed, how much they charge, minimum investment, and performance. Everything is right there for you.
*It’s important when looking at your funds to look at the “expense ratio.” This is listed by EVERY fund, and will tell you what you are paying. Anything around .04% is extremely good.
Finally-as you probably already know, money you invest in the market, is not guaranteed (like a bank for example) but you will also NEVER make the returns in a bank that you can in the stock market. (The stock market average return is 10% over the last 30 years, and 8% if you consider inflation). Investing doesn’t have to be hard if you stick to the basics-which is what Warren recommends, and also does himself.
P.S. And if you weren’t already impressed, Warren donated the winning money to a charity. Because that’s the kind of guy he is.