Warren Buffett: How Most People Should Invest

[Music] So Warren Buffett, we know he is the world's best investor, and he has built his fortune by analyzing individual businesses and buying them at discounted prices. His strategy can essentially be summarized by just waiting and waiting and waiting until you get that perfect opportunity. And then, when you've got that opportunity to buy a great company at a discounted price, he buys heavily, and then he aims to hold that stock for decades and decades and decades.

This strategy has led him to buy into businesses such as Coca-Cola, Apple, Bank of America, and American Express, and all these positions have done remarkably well for Buffett over the years. However, the real secret to Buffett's success is not necessarily in his strategy; it's his temperament. Some people should not own stocks at all because they just get too upset with price fluctuations. If you're going to do dumb things because your stock goes down, you shouldn't own a stock at all.

What are dumb things? Selling a stock. Yeah, it's selling the stock because it goes down. I mean, if you buy your house at twenty thousand dollars and somebody comes along next thing and says, "I'll pay you 15," you don't sell it because the quote's 15. You look at the house or whatever it may be. But some people are not actually emotionally or psychologically fit to own stocks. But I think there are more of them would be if you get educated on what you're really buying, which is part of a business.

Isn't that interesting that literally the world's best stock picker says if you don't have the right temperament, don't even try to do what he does? And I know this talk of having the right temperament and how it's so important sounds a little bit wishy-washy, but it's actually true, believe me. Okay? Because a lot of like the main reason investors that pick individual stocks lose money is not because they don't find great businesses; most people out there find great businesses to buy.

The problem, the reason they lose money is that they get influenced by their emotions; they end up buying and selling those great businesses at completely the wrong times. So what do you do if you want to be an investor, but you quite simply can't keep your emotions in check? And by the way, it's totally okay if you recognize that you are one of those people, that you're not going to be able to keep your emotions out of your investing.

Well, luckily for you, over the past few decades, there has been a stock mark—there's been an investing approach that has gained tremendous popularity; that is of course passive investing through ETFs, through index funds. It's essentially where you buy one stock, and that one stock actually represents wide diversification. In a lot of instances, it represents diversification across the whole market.

So the idea here is that you just show up each and every year, and you continue to buy into the market, rain, hail, or shine. You show up every single year, and you do that year after year for decades and decades and decades on end. And what that does is it takes the emotion out of investing. You're not trying to pick the right times to buy in and out; you're not trying to pick the right companies to buy in and out of. Instead, you're just backing the market in general, showing up each and every year.

Over a long period of time, that means you will average out to the average market return. And here's the thing I find crazy: that this stock market approach is the stock market approach that Warren Buffett, the world's best active investor, recommends for most investors.

So this time I went back actually to 1942 when I bought my first stock as an illustration of all the things that have happened since 1942. We've had 14 presidents, seven Republicans, seven Democrats. We've had world wars; we had 9/11; we had the Cuban missile crisis; we have all kinds of things. The best single thing you could have done on March 11, 1942, when I bought my first stock, was just buy an index fund, and never look at a headline, never think about stocks anymore, just like you would do if you bought a farm.

You just buy the farm or let the tenant farmer run it for you. And I pointed out that if you put ten thousand dollars in an index fund that reinvested dividends—and I paused for a moment to let the audience try and guess how much it amounts to—it would come to 51 million dollars now. And the only thing you had to really believe in then is that America would win the war and that America would progress as it has ever since 1776.

And that American business, if America moved forward, American business would move forward. You didn't have to worry about what stock to buy; you didn't have to worry one day to get in and out; you didn't have to know the Federal Reserve would exist, whatever it might be. And, uh, America works. And this is why Warren Buffett likes to recommend this strategy: it takes the psychological aspect out of your investing.

It takes away the need to have that right temperament, right? You don't need to know what stocks to buy; you don't have to worry about what day to get in and what day to get out, and it still produces a great result if you give it time. And that's really the second big thing to successful investing: firstly, you need the right temperament, but secondly, you need to allow enough time for the magic to happen.

Because don't get me wrong, like there are some periods of time where the market goes nowhere for like 10 years. For example, from 1966 to 1978, the market did nothing—zero. You got a zero return. But if you just held on for another 10 years, all of a sudden you've got a total return of 187 percent and a compound annual growth rate of five percent.

So what's that? Twelve years for zero or 22 years for 187 total? So it's a strategy that works consistently if you go the journey with your dollar cost averaging. And here's Warren Buffett talking specifically to that point: “So I would pick a broad index, but I wouldn't toss a chunk in at any one time. I would do it over a period of time because the very nature of index funds is that you are saying I think America's business is going to do well reasonably well over a long period of time, but I don't know enough to pick the winners and I don't know enough to pick the winning times."

There's nothing wrong with that. I don't know enough to pick the winning times. Occasionally, I think I know enough to pick a winner, but not very often, and I certainly can't pick winners by going down through the whole list and saying this is a winner and this isn't and so on. So the important thing to do, if you have an overall feeling that businesses are a reasonable place to have your money over a long period of time, is to invest over a long period of time and not make any bet implicitly by putting a big chunk in at a given time.

So yesterday, the course—and remember, dollar cost averaging is the way to go because it protects you from two different things. It protects you firstly from your own emotions, and then secondly, it protects you from what can be market-wide swings—quite drastic market-wide swings—because if you hang in there for the long period of time, you continue to show up each and every year. Slowly but surely, you average out to that average market return.

So work out your plan, keep showing up year after year, decade after decade, and overall, that is why Warren Buffett likes this strategy so much and is so quick to recommend it. Even before he recommends his own investing strategy, and he's held this opinion for a long time too.

This is an excerpt from his 1996 annual letter to shareholders where he said, "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results after fees and expenses delivered by the great majority of investment professionals." And it's true, if you follow this approach, the evidence shows that you are likely going to beat 70 to 80 percent of actively managed funds that are run by the professionals.

If we have a look here in the U.S., 78 percent of active funds haven't beaten the S&P 500 over the past five years. Here in Australia, 80 percent of active funds haven't beat the S&P ASX 200 over the past five years. In fact, Warren Buffett was so sure that active funds would underperform index funds that he made a one million dollar bet with Protégé Partners LLC that over a 10-year period, a hand-picked selection of hedge funds would underperform the S&P 500. And sure enough, Warren Buffett won easily.

Heck, Warren Buffett has even recommended buying index funds to LeBron. My first question would be, “Um, yeah, what should I invest in next? Can I have some tips?” I think somebody like LeBron—and we've talked about it—but I think you and LeBron have talked about it occasionally.

I think, actually, through the rest of his career and beyond in terms of earning power, then just making monthly investments in a low-cost index fund makes a lot of sense. I think that somebody's position ought to have a significant cash reserve and whatever makes them comfortable, and then beyond that, owning a piece of America, a diversified piece bought over time, held for 30 or 40 years, it's bound to do well, and the income will go up over the years, and there's really nothing to worry about.

So there you go: Warren Buffett, the world's best stock picker, recommends passive investing for most people. No, he doesn't believe it is the best strategy to make money because otherwise he would follow it. But he does think it is the best strategy to make money for most people, and quite simply, the reason for that is it takes away the number one thing that kills active investors time and time again—that is their temperament.

When you're a passive investor, you don't need the right temperament; you just need to commit to a dollar cost averaging strategy, and then you just need to keep showing up. Anyway, guys, that is it for this video. If you would like a full run-through of the passive investing strategy and how to get started with it, then check out the links down in the description.

Head over to Profitful—it's a four-hour course called Stock Market Investing for Beginners. Definitely check that out because it's usually at this point a lot of people that are new to the markets, they recognize, “Oh, okay, dollar cost averaging, passive investing, this is what I've got to do.” But then they never start. So in that course, there's lots of practical steps to actually make sure you follow through and start your investing journey.

So if you're interested, check that out. Leave a like on the video if you did enjoy it or if you found it useful—of course, it helps out the channel a lot; it helps out the video a lot, and I really appreciate it. So thank you very much, and subscribe if you haven't done so already. There's like a ridiculously low percentage of viewers on my channel that are actually subscribed.

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