Why You Shouldn’t Listen to Warren Buffett on Stocks

By MoneyMorning.com.au

You know the old saying, Do what they do, not what they say.

That saying applies to people who say one thing and then do another.

It can be misleading.

It can even be hypocritical.

But sometimes the people who say one thing and do another dont even realise that they arent following their own advice.

Often well give them the benefit of the doubt. But we wont do that with Warren Buffett

Warren Buffett is the worlds most famous stock picker.

Hes made a multi-billion-dollar fortune by analysing and investing in stocks and specific companies.

He also takes big risks. He invests in the market at times when few others would take the risk.

He has also invested in complex securities and derivatives including the type of investments that only Harvards brightest can fathom.

In doing so, Buffett has built a fortune to make him the worlds third-richest person. Hes worth US$67.3 billion.

Given all that, youd think Buffett would have some useful advice about taking risks and making the most of the market. You would be wrong. That may be how he made his fortune, but thats not how he suggests you build your wealth.

Bad advice from the Oracle

According to the Financial Times :

Mr Buffett said his advice for the cash left to his wife was that 10 per cent should go to short-term government bonds and 90 per cent into a very low-cost S&P 500 index fund.

This is from the guy known as the Oracle of Omaha. Hes the worlds greatest investor. And yet, we cant think of worse investment advice than telling someone to put 90% of their wealth in an index fund.

There are a number of reasons why this is bad advice.

The first is clear.

If index investing is the best way to build and preserve wealth, why on earth has Warren Buffett spent the past 60 years of his life searching for good investments?

Why does he bother looking at balance sheets and profit and loss statements?

Why does he try to understand a company before he invests in it?

If investing in a low-cost index fund is the path to riches, why is no one on the Bloomberg Billionaires Top 100 list rich due to investing in low-cost index funds?

If this really were the way to grow rich, Mr Buffett could have put all his money in Vanguards index fund when they launched it in 1975. He could then have spent the past 39 years playing golf or going on holidays.

The reality is that Mr Buffett knows as well as we do that throwing cash into an index fund isnt the way to get rich.

But those arent the only reasons to ignore Buffetts index fund advice.

Do what he does not what he says

Lets take the biggest reason of all the performance of Warren Buffetts investment firm, Berkshire Hathaway [NYSE:BRK/A]. from 1977 to 2012.

According to a report from CNBC last year:

Since 1977, Berkshire has averaged a 26.3 percent annual gain vs. the S&Ps 8.8 percent advance.

Do you see what we mean when we talk about doing one thing and saying another?

Sure, go ahead, take Buffetts advice. Over the long term you may make a nice 812% annual return.

If that makes you happy, fine.

But, quite frankly, why would you settle for that when you can do as Buffett does rather than as he says? That means being the type of investor that Buffett criticises someone who looks to actively manage their wealth.

Think about it further. Buying an index fund is the opposite of everything Buffett stands for. The Buffett worshipers always say how he only buys quality businesses.

Does anyone really think that every stock in the S&P 500 index is a good business? There would be some bad businesses in that index, just as there are bad businesses in the Aussie S&P/ASX 200 index .

We like the idea of buying an index to get some exposure to the market something is better than nothing. But if you want good advice, it should always be to buy individual stocks. You should choose the stocks you buy rather than just buying a whole bunch of stocks at random.

Now, if past experience is anything to go by, the Buffett crazies will be up in arms at this. Theyll ask who we are to question the investment advice of a billionaire.

The reality is were simply pointing out that investors should ignore Buffetts advice and instead follow his example. Buffett has made a lot of money. Wed like other investors to make a lot of money too. That doesnt mean buying index funds.

It means speculating, taking risks, and buying the best companies (stocks) that money can buy.

Cheers,

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