Transcript:
ANDY SERWER: So, I want to ask a little bit about some of the new investing things going on in the markets. Gregg Wondra from Bakersfield wonders about target-date funds, and I wanted to also ask about all the new index funds "with a brain." Are those things really adding value?
The Danger of "Index Funds with a Brain"
WARREN BUFFETT: No, probably not. The S&P 500 index is the one to use. That's the one I used in that bet I made for 10 years. It's the one I've told the trustee for my wife to put 90% of the funds I leave her into.
FAST FACT
In 2007, Warren Buffett issued a challenge to the hedge fund industry: he bet $500,000 that a low-cost S&P 500 index fund would outperform any collection of high-fee hedge funds over the next decade. Ted Seides of Protégé Partners accepted the bet. By the time it concluded in 2017, Buffett’s S&P 500 index fund had delivered a 7.1% annual return, while the basket of professional hedge funds averaged only 2.2%.
The S&P 500 is—I don't know whether it's 80% of the market value of everything you can buy in this country. I think it's over 20 trillion. And you're buying America. And let me give you a figure that'll blow your mind, I think. I bought my first stock when I was 11 years old. It was the first quarter of 1942, shortly after Pearl Harbor. I spent $114.75; three shares.
The $114.75 into $400,000 Math: The Power of Reinvested Dividends
WARREN BUFFETT: If I put that $114 into the S&P 500 at that time and reinvested the dividends, think of a figure as to what it would be worth today.
ANDY SERWER: Oh, man.
WARREN BUFFETT: I just want your audience to think for a second. The answer is about $400,000. So if I, as a little kid, had taken that 114 bucks—from shuffling snow or whatever I'd done — it would be $400,000 today within one person's lifetime. That's America. That isn't me. You know, it is the huge tailwind the American economy gives to any equity investor.
1–3 Years is a Gamble, but 20 Years is a Strategy
WARREN BUFFETT: Now, the market's gone down many times during that time. People have panicked during that time. Headlines have been terrible. You know, it looked like we were losing the war, first of all. But America is a powerful economic machine that, since 1776, has worked and it's going to keep working.
You don't want to buy to hold for a year. You don't want to buy with the idea that you could sell it in two years or three years and necessarily make money. You may lose money that way. But if you buy it for 10 or 20 — just keep buying the S&P 500 index and forget about all the other nonsense that's being sold to you. Because I'll guarantee you one thing about the stuff being sold to you: it will carry bigger fees than what I'm talking about.
ANDY SERWER: Yeah. And there's no reason to think that — we don't know if it's $400,000 — but that same sort of process or returns won't happen starting right now.
WARREN BUFFETT: The S&P 500 companies have earned well over 10% on equity, often 15% annually, for years and years and years and years. It’s done it with Democratic administrations and with Republican administrations. Now, you get money compounding at that kind of rate underlying your investment and you get a diversified group of that — I mean, you're going to do well.
