What do physicians and Warren Buffet have in common? The ability to capture the public’s attention with expertise in an area of great interest. The public listens and takes note, but often doesn’t follow the advice offered. Right? One could argue that the follow-through rates for patients following your advice is actually much higher than those tuning in to what Mr. Buffet has to say.
It’s interesting that the fourth wealthiest person in the world, according to Forbes, and one of our time’s most successful investors offers the public investment counsel, yet his simple message to investors to avoid trying to beat the market often falls on deaf ears. His suggestion to implement a portfolio of well-diversified, low-cost mutual funds and think long-term is not well-followed by the masses.
His recent letter to Berkshire Hathaway shareholders reveals that he has directed, upon his passing, the trustee for his wife’s benefit to “put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” This direction, and the section of the annual letter containing it, evidence his understanding of the flaws in active management, the high costs (transaction fees, taxes, etc.) associated with attempting to time the market and the nearly-inevitable missed opportunities for return.
Consider this if you’re still in doubt….Morningstar’s most recently released data show that at the end of 2013, the average US equity mutual fund had a 10-year average return of 8.18%. Meanwhile, the average investor only earned 6.52% during that same stretch. Why the 1.66% return difference? Investors held their equity positions on average for only six months, missing out on the “ups” more than they avoided the “downs,” all the while creating higher costs for themselves.
The majority of investors, and their advisors, govern their portfolios with emotion and the premise that they are somehow privy to some bit of information known only to them, and actively trade on this perceived proprietary information. The notion that what you just read in the paper or heard on a cable financial show is somehow “new” information that you can now leverage to improve your portfolio returns is fundamentally flawed. By the time you hear it or read it, information is already old and market prices have likely already adjusted before you have the opportunity to “take advantage.”
In the words of one of Buffet’s more famous quotes: “Benign neglect, bordering on sloth, remains that hallmark of our investment process.”
Stay diversified folks.
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