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DIY Investing

Warren Buffett sings a different tune in his advice to investors Add to ...

It can be hard for investors to follow Warren Buffett's coattails and invest in the stocks he buys.

He doesn't alert the market every time he makes a trade and following his moves through the securities filings his company makes can be challenging at the best of times.

But there is a way to follow Mr. Buffett's advice without having to scrutinize the Oracle of Omaha's every move in the stock market. It's advice he's repeated year after year as a tip for ordinary investors, but it doesn't get much air time: Believe it or not, the stock picking giant suggests investors choose a low-cost, less risky avenue to invest: low-cost index funds.

Before elaborating on Mr. Buffett's investment recommendation, let's explain why it's difficult to follow his investment moves. There are two ways to tell what Mr. Buffett is buying and selling from filings by his company, Berkshire Hathaway Inc. , to the U.S. Securities and Exchange Commission (SEC). One is insider trading records known as Form 4 filings. The other is quarterly statements of Berkshire Hathaway's investment holdings, known as 13F forms.

The insider filings are limited to situations where Berkshire Hathaway is a beneficial owner, with at least a 10-per-cent stake in the stock of a company. The quarterly 13F filings are more comprehensive but dated: when they are released, the transactions recorded in them may have occurred one to three months ago, quite a lag to make an effective trade.

The 13F filings have other caveats. They include:

  • Stocks appearing in the filing are often purchased by money managers at subsidiaries in Berkshire Hathaway, not by Mr. Buffett.
  • The SEC allows Berkshire Hathaway to postpone disclosure of transactions on the grounds that it may interfere with plans to build a position in the stock (so the 13F may not show investments for several quarters).
  • The 13F does not report on privately arranged investments (for example, the billions of dollars invested in late 2008 in the perpetual preferred shares of Goldman Sachs and General Electric).

Sometimes it's possible to see through the veil and come up with an idea or two. An article earlier this year looked at Berkshire Hathaway's 13F filings and named Burlington Northern Sante Fe Corp. as his "one best idea." A few months later Mr. Buffett made a bid for the rest of the railway's shares at a 30-per-cent premium to the market.

So it can be done, perhaps. But Mr. Buffett has said he would be happy to get one good idea a year. So, much of his buying and selling in a quarter may not carry the kind of conviction that would make a solid long-term bet. Indeed, it may be some time before we again see Mr. Buffett backing up the truck and loading up on a stock like he did with Burlington Northern.

Besides, Mr. Buffett has long recommended that investors do something else other than follow his transactions. And he has said it repeatedly in his annual letter to shareholders and in response to questions from reporters and shareholders at annual meetings.

What he recommends is buying index funds. One of his earliest statements to this effect was made in the 1996 investment letter to Berkshire Hathaway shareholders: "… the best way to own common stocks is through index funds," he wrote.

In his 1997 letter, he expanded on the theme: "Let me add a few thoughts about your own investments. 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."

Nearly every year, Mr. Buffett reinforces this message. In 2008, for example, he gave this investment advice to a shareholder: "I would just have it all in a very low-cost index funds from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform … and I could just go back and get on with my work."

In a CNBC interview, Mr. Buffett added dollar-cost averaging to his index-fund recommendation: "If you buy equities across the board [through index funds] and you do it over time so you don't put all your money in at the wrong time … that's probably the best investment most people can make."

In short, Mr. Buffett's one best idea for most investors is to invest in index funds via dollar-cost averaging - this is the best way to tap into the dynamism and growth potential of free-market economies. Then focus on your career, your family, and enjoying life: that is where your time is best allocated. Some good advice from the Oracle of Omaha.

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