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The author uses Buffets essay to justify value investing over index funds, but Buffet is a strong proponent of index funds for non professional investors. Inst

by meany 5y ago

The author uses Buffets essay to justify value investing over index funds, but Buffet is a strong proponent of index funds for non professional investors. Instead of stock picking, Buffett suggested investing in a low-cost index fund. “I recommend the S&P 500 index fund,” Buffett said, which holds 500 of the largest companies in the U.S., “and have for a long, long time to people.” He’s even putting 90% of his own estate into index funds. https://www.google.com/amp/s/www.cnbc.com/amp/2019/02/26/warren-buffett-wants-90-percent-of-his-estate-invested-in-index-funds.html https://www.google.com/amp/s/www.cnbc.com/amp/2019/02/26/war...

anonu 5y ago
Interesting. Investing in Berkshire is like investing in a diversified index fund.
- derf_ 5y ago
  Maybe from 10,000 feet. Buffett only invests in certain kinds of companies (those within his "circle of competence"), so you only get so much diversity. Also, because Berkshire is a conglomerate, businesses which generate large amounts of cash (e.g., insurance float, or businesses that would pay dividends if they were a stand-alone companies) can be used to fund capital-intensive businesses (railroads, energy companies, etc.) without paying taxes to move the money from business A to business B, because they're all owned by the same legal entity. Don't underestimate the power of this effect. It is not possible to achieve with an index fund.
  - danielmarkbruce 5y ago
    What will Buffett not invest in today? He used to have a tight circle of competence, but if you look at his portfolio today, you'll see financials, energy companies (of various types), technology, healthcare, industrials, consumer (staples and discretionary), media, telco. And then his guys invest even wider.
  - zzleeper 5y ago
    You made me think. The weights of e.g. the SP500 are not ideal then. Berkshire is in the SP500, but so are Apple, Coca Cola, Amex, BoA, etc. which are Berkshire largest investments. So if Coca Cola has an idiosyncratic hit, then you get hit twice by it: first in your KO holdings, then in your BRK.A holdings. At the extreme, if there is a company that then invests in Berkshire and so on, you could end up overweighting a lot certain firms. Also, isn't there double counting in terms of the stock market cap?
    - martin_a 5y ago
      > So if Coca Cola has an idiosyncratic hit, then you get hit twice by it I think that is neglibile, depending on how big you define a hit. If Burger King gets hit, that will probably effect Coca Cola as the largest supplier (just saying it like that, don't know if they really have that kind of business with each other), too. There's lots of dependency in the modern world, I don't think it really matters. edit: If Coca Cola does well, you profit twice. Maybe see it that way... ;-)
    - gruez 5y ago
      It might be if your investment strategy was to allocate equal amounts to each sector, but that's not how most passive funds work. Instead, they allocate based on market-cap weighted basis, which means there's no double-count going on.
    - atombender 5y ago
      No. The S&P 500, like most other market-cap-weighted indexes, uses float-adjusted market cap, meaning that they exclude shares owned by other public companies when computing the weightings. So the fact that BRK.A owns shares in other companies in the index is accounted for; you don't get double counting, and so your exposure is not inflated.
      - anonu 5y ago
        You're right on float adjustment. But shares of coke held by Berkshire are still considered part of float.
vishnugupta 5y ago
> The author uses Buffets essay to justify value investing Those using Buffet's name should also look at the time and effort Buffet puts in to pick stocks. He sifts through reams of reports, cash flow statements and what not. And to top it up you need deep pockets and emotional wherewithal to not blink when your value investment bets are not doing well. "Value investment" sounds cool but is not for a typical retail investor. As you rightly pointed out retail investors are best served picking up an index fund or 2-3 mutual funds if they are seeking to diversify.
skeeter2020 5y ago
Plus Buffet gets deals that no one else would ever be offered. The benefit is huge signal value from his investment that none of us can provide, and companies pay for that with way better terms. This value gets priced in BH shares and the circle continues.

by meany 5y ago

anonu 5y ago

Interesting. Investing in Berkshire is like investing in a diversified index fund.

derf_ 5y ago
Maybe from 10,000 feet. Buffett only invests in certain kinds of companies (those within his "circle of competence"), so you only get so much diversity. Also, because Berkshire is a conglomerate, businesses which generate large amounts of cash (e.g., insurance float, or businesses that would pay dividends if they were a stand-alone companies) can be used to fund capital-intensive businesses (railroads, energy companies, etc.) without paying taxes to move the money from business A to business B, because they're all owned by the same legal entity. Don't underestimate the power of this effect. It is not possible to achieve with an index fund.
- danielmarkbruce 5y ago
  What will Buffett not invest in today? He used to have a tight circle of competence, but if you look at his portfolio today, you'll see financials, energy companies (of various types), technology, healthcare, industrials, consumer (staples and discretionary), media, telco. And then his guys invest even wider.
- zzleeper 5y ago
  You made me think. The weights of e.g. the SP500 are not ideal then. Berkshire is in the SP500, but so are Apple, Coca Cola, Amex, BoA, etc. which are Berkshire largest investments. So if Coca Cola has an idiosyncratic hit, then you get hit twice by it: first in your KO holdings, then in your BRK.A holdings. At the extreme, if there is a company that then invests in Berkshire and so on, you could end up overweighting a lot certain firms. Also, isn't there double counting in terms of the stock market cap?
  - martin_a 5y ago
    > So if Coca Cola has an idiosyncratic hit, then you get hit twice by it I think that is neglibile, depending on how big you define a hit. If Burger King gets hit, that will probably effect Coca Cola as the largest supplier (just saying it like that, don't know if they really have that kind of business with each other), too. There's lots of dependency in the modern world, I don't think it really matters. edit: If Coca Cola does well, you profit twice. Maybe see it that way... ;-)
  - gruez 5y ago
    It might be if your investment strategy was to allocate equal amounts to each sector, but that's not how most passive funds work. Instead, they allocate based on market-cap weighted basis, which means there's no double-count going on.
  - atombender 5y ago
    No. The S&P 500, like most other market-cap-weighted indexes, uses float-adjusted market cap, meaning that they exclude shares owned by other public companies when computing the weightings. So the fact that BRK.A owns shares in other companies in the index is accounted for; you don't get double counting, and so your exposure is not inflated.
    - anonu 5y ago
      You're right on float adjustment. But shares of coke held by Berkshire are still considered part of float.

vishnugupta 5y ago

> The author uses Buffets essay to justify value investing Those using Buffet's name should also look at the time and effort Buffet puts in to pick stocks. He sifts through reams of reports, cash flow statements and what not. And to top it up you need deep pockets and emotional wherewithal to not blink when your value investment bets are not doing well. "Value investment" sounds cool but is not for a typical retail investor. As you rightly pointed out retail investors are best served picking up an index fund or 2-3 mutual funds if they are seeking to diversify.

skeeter2020 5y ago

Plus Buffet gets deals that no one else would ever be offered. The benefit is huge signal value from his investment that none of us can provide, and companies pay for that with way better terms. This value gets priced in BH shares and the circle continues.