Index investing, often seen as a simple and passive strategy, is gaining popularity among investors worldwide. The foundation of this revolution was John Bogle, the founder of Vanguard, who created the first index funds. But what exactly makes index investing so attractive? Let’s look at the opinions of leading experts in this field.
Warren Buffett: Simplicity and Effectiveness for Everyone
Warren Buffett, one of the most respected investors in the world, believes that index investing is ideal for most people. In his 2013 letter to shareholders, Buffett reveals that in his will, he recommends putting 90% of the funds in a low-cost S&P 500 index fund and 10% in short-term government bonds.
My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I believe the trust’s long-term results from this policy will be superior to those attained by most investors.
Buffett emphasizes that the average investor does not need the skills to analyze companies because American business as a whole is doing great. An S&P 500 index fund allows you to own a cross-section of companies that, in total, will certainly do well.
Aswath Damodaran: Active Management Under the Microscope
Aswath Damodaran, a professor of finance at the Stern School of Business at New York University, is critical of traditional active management. He believes that many managers charge high fees for actions that can be automated with ETFs.
Active managers, in most cases, are lazy and inefficient. Most portfolio managers who charge 1.5-2 percent for managing money were blindly buying stocks with a low P/E ratio, hoping they would go up. You know, I can create an ETF of stocks with a low P/E ratio and not charge you any fees.
Damodaran is convinced that active investing should be concentrated on managers who actually add value, not just perform basic analyses that ETFs can do more efficiently and cheaply.
Barry Ritholtz: Boredom as a Key to Success
Barry Ritholtz of Ritholtz Wealth Management emphasizes that good investing should be boring. His proposal for Jim Cramer’s CNBC program is to repeat daily:
Have a broadly diversified portfolio of low-cost index funds from around the world. Do rebalancing once a year. See you tomorrow.
Ritholtz believes that simplicity and consistency in index investing are key to achieving long-term success.
Other Experts on Index Investing
- Jim Norris (Vanguard): Highlights the mathematical advantage of passive investing, pointing out that John Bogle intuitively understood the problem of active management.
- Christine Benz (Morningstar): Believes that active funds have contributed to the success of index funds by not sharing economies of scale and maintaining high fees.
- Rick Ferri: Compares index investing to changing religion, suggesting that once you understand its advantages, it is difficult to return to active investing.
- Gus Sauter (ex CIO Vanguard): Notes that index fund investors are more cautious and stick to their strategy even in difficult times.
- Jason Zweig (Wall Street Journal): Admits that index investing is counter-intuitive and boring, but effective.
- John Bogle (Vanguard): Jokes that if he had hidden the fact that his fund was an index fund, he would have been considered the best equity fund manager.
Warren Buffett’s Bet
One of the most famous curiosities related to index investing is Warren Buffett’s famous bet from 2007. Buffett, considered one of the best investors of all time, bet a million dollars that a simple S&P 500 index fund would beat a group of carefully selected hedge funds over 10 years.Buffett argued that the high fees and excessive trading characteristic of hedge funds reduce their long-term performance. The bet began on January 1, 2008, and ended on December 31, 2017.
After ten years, it turned out that Buffett was right. The S&P 500 index fund achieved a cumulative return of 125.8%, while the basket of hedge funds selected by the asset management company Protégé Partners (which accepted the bet) achieved a return of only 36.3%.
This bet not only brought Buffett a win, but also became a powerful argument for index investing, demonstrating its effectiveness even compared to the most sophisticated investment strategies.
Summary
Index investing, although it may seem boring and unintuitive, is a strategy valued by many experts for its simplicity, low cost and long-term effectiveness. Quotes from Warren Buffett, Aswath Damodaran and other specialists confirm that passive investing can be an excellent solution for most investors, regardless of their level of experience.
