May 10, 2016

Is Warren Buffett really a big fan of the S&P 500?

Buffett is a big fan of the S&P 500. He has already declared that 90 percent of the money he leaves to his wife will be invested in Vanguard’s S&P 500 index fund. He also wagered a million dollars that Vanguard’s S&P 500 index fund would beat a basket of hedge funds over ten years from 2008 to 2017. (The S&P 500 index fund is currently crushing the hedgies.)

Buffett’s enthusiasm for the S&P 500 is a wee bit odd because he has spent an entire career guided by the investment principles of his teacher, Ben Graham, who can genuinely be called the godfather of active investing. Graham’s investment approach, in a nutshell, is to buy quality companies at a cheap price. That’s the furthest thing from just throwing your money into an S&P 500 index fund.

At the same time, Berkshire’s portfolio is also higher quality than the S&P 500. The companies in Berkshire’s portfolio have an average return on equity of 13.1 percent versus 12 percent for the S&P 500, and Berkshire’s companies’ earnings are less volatile than the earnings of the S&P 500.


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