Warren Buffett has long recommended investing in index funds.
For everyday investors, owning a low-cost passive fund gives them access to the broader belt of the market. This helps reduce the risk of one or several shares of slides running through portfolio performance with torpedoes. Plus, in the long run, it will come ahead of many professional investors, says Berkshire Chairman Hathaway.
“In my view, for most people, the best thing to do is own an S&P 500 index fund,” he said at the 2021 Annual Meeting of Berkshire Hathaway Shareholders.
In fact, over the 15 years that ended June 30th, only 12% of the actively managed funds tracking large US stocks outperformed the S&P 500, according to S&P Global.
Jim Kramer agrees to Buffett’s philosophy to some extent. CNBC’s Mad Money host says that the broad market index fund should compensate for about half of the portfolio, and most of the rest should be paid to a small number of individual stocks.
The central idea around Cramer’s new book, “How to Make Money in What Markets” is simple. In addition to owning a diverse portfolio, everyone can also be well versed in studying and owning stocks.
“Let’s say you were my way, my program, you were half an index fund and you chose a good stock. How about Berkshire Hathaway?” Cramer tells CNBC will make it. “If you had bought Berkshire Hathaway, you would have made a lot of money.”
Since its inception in 1982, S&P 500 shares have returned a cumulative 11,916%. Berkshire stocks rose 133,775%.
Why Kramer is different from Buffett
Buffett’s advice applies to what he calls “a knowledgeless investor.” That’s because Buffett, a great stockpicker, knows how much work it takes to build a portfolio that will capture the market.
“You don’t want to get the impression you can pick stocks,” he said in 2017 of CNBC money.
Rather, he said, “The trick isn’t about choosing the right company. The trick is essentially buying all the big companies through the S&P 500, doing it consistently, doing it in a very low-cost way.”
However, Cramer argues that anyone can pick great stocks and shouldn’t settle for index returns.
“I don’t like the average even if I accept it as a necessary evil in a diversified portfolio,” he wrote in his book. “Are you proud to be average in other life? Did you buy the average method by Mediocre Joe for a book called Making Money? S&P is average.”
To beat the average, Kramer says, you need to pick a small number of stocks that will bring in amazing long-term growth. This is an easier task than you would say. But to find examples of investors who have broken the odds, Buffett needs to look even further than the arena’s Full Berkshire Hathaway shareholders attending his annual meeting, Cramer says.
“I’ve been recommending the stock since 1982. How do you think I did it for people and index funds?” Kramer says. “I crushed it.”
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