What Would Buffett Do?

Swedroe_BuffettWhen I set out to educate myself about investing, Larry Swedroe was one of the most influential authors I encountered. What I loved about his books (including The Only Guide to a Winning Investment Strategy You’ll Ever Need and, more recently, The Quest for Alpha) was that every argument was backed up by academic research.

So I was surprised to see his latest book, Think, Act, and Invest Like Warren Buffett, is a slim volume with only a few scattered footnotes. And knowing Swedroe’s passion for passive investing, I wondered why his title invoked the world’s greatest stock picker. I recently had the pleasure of speaking with Larry Swedroe via Skype, and he shared the backstory:

“I’ve learned over the years that relatively few people are interested in the evidence and the data. Maybe 10% of the audience wants that stuff: engineers love my other books, and they wouldn’t like this one. Then there are those you might call investment geeks who want all the research, and they will even read the original papers. But for the vast majority it’s, ‘Just tell me the answer, and I don’t want to know the research behind it.’ They won’t read a 300-page book.

“A little more than a year ago I was with a prospect who was worried about the markets and had gone to cash. I was trying to point out all the evidence and logic about why you shouldn’t use active managers, and it just wasn’t getting through. There was a politician who once said, ‘Don’t confuse me with the facts; I’ve got a closed mind.’ So I realized this was a pointless discussion, and often what I’ve done in these situations is just say we’re not the right firm for you.

“But then I thought, maybe it’s my problem. Maybe there is a better way to convince him if it can’t be with evidence. So I said, ‘Forget what I think, and forget what the research says. Let’s just set that aside.’ I asked him who he thought was the greatest investor of our generation. I knew if you ask 100 people that question, 99 of them are going to say Warren Buffett. And of course, he did too.

“So I said, ‘If you don’t want to take my advice, and you don’t want to look at the evidence, do you think it would be intelligent to follow Buffett’s advice?’ And the guy said yes. Then we looked at three key issues to see what Buffett has to say.”

Do as I say, not as I do

Swedroe is quick to acknowledge that almost no one can actually invest like Buffett. “You can’t buy whole companies, you can’t get on their board, you can’t strike a special deal with Goldman Sachs because you can’t write a $5 billion cheque.” Indeed, the Oracle himself has long been discouraging others from trying to imitate him. So Swedroe started by pointing out that since the 1990s Buffett has encouraged the average investor to simply buy the market. “Basically he says, ‘If you look in the mirror and you don’t see me, you should invest in index funds.’”

Then Swedroe asked his prospective client to consider Buffett’s opinion of market gurus. “This guy was citing all kinds of forecasts and newspaper articles. I told him Buffett says you should ignore all forecasts because they don’t tell you anything about where the markets are going, but they do tell you a lot about the person making the forecast.”

Finally, Swedroe shared Buffett’s opinion of market timing. “He says, you shouldn’t try to time the market, but if you are going to do so, you should buy when everyone else is panic-selling. This guy was doing the opposite: he was doing the panic-selling.”

The message finally seemed to get through the jittery investor, and Swedroe had found the hook for his next book. I’ll share more from our interview later in the week.

18 Responses to What Would Buffett Do?

  1. Robb January 28, 2013 at 8:57 am #

    I’m reading, Tap Dancing to Work, which is a collection of Fortune articles about Buffett, from 1966 – 2012. In it, Buffett explains a number of times why the average investor should buy low cost index funds instead of trying to pick stocks or use actively managed funds.

    He especially rails against hedge funds, and ‘funds of funds’. He says that frictional costs and ‘helpers’ will eat into your returns so you need to focus on keeping those costs down as much as possible.

    He’s even put his money where his mouth is. He bet Ted Seides of Protege Partners $1 million for charity that an S&P index fund would outperform 5 funds of hedge funds of Seides’ choosing over a 10 year span.

    Buffett is ahead at the halfway mark. Fortune says the Vanguard index fund that Buffett picked is up by 8.69%, while the 5 funds of funds picked by Seides are up 0.13%.

    You can follow the bet here – http://longbets.org/362/

  2. John Ukos January 28, 2013 at 9:20 am #

    I feel very comforted that Buffet is a proponent of index investing. It helps to hear Swedroe is helping spread the word.

  3. Oldie January 28, 2013 at 10:03 am #

    @CCP: So, Buffet said

    “He says, you shouldn’t try to time the market, but if you are going to do so, you should buy when everyone else is panic-selling.”

    Although that advice (the latter part) sounds superficially helpful, from a Couch Potato’s viewpoint, actually what practical use can we take away from this?

  4. B January 28, 2013 at 10:17 am #

    @Oldie:

    The advice is simply another way of saying to re-balance your portfolio if a large shift in the markets pushes one of your holdings past one of your re-balancing thresholds. Panic selling will likely cause at least one of your asset classes (usually equity) to drop significantly. Harvest your winnings from other asset classes that are up, and buy the one that is down.

  5. Dave L January 28, 2013 at 10:42 am #

    @Oldie and B: I agree that rebalancing is one of the things that WB meant, rebalancing by selling your winners, and put that money on the losers (within your CCP portfolio of course). WB also said to be greedy when others are fearful.

    Take Andrew Hallam from Millionaire Teacher, I read somewhere on here (or maybe on his blog) that during the financial crisis of 08/09, he sold his bond (I can’t remember if he sold it all, or just trim it back to his original %) and bought equities, both index ETF’s of course. We all know what happened since the melt down, and he made out like bandits.

  6. Dave L January 28, 2013 at 10:46 am #

    Another thing I forgot to say is if you have some cash sitting on the sideline when the stock market is going down the toilet, be brave and jump into the market with both feet. Invest that chunk of money, because stocks will always recover over the long run.

    I regret that I didn’t know anything about stocks and investment during the crisis, otherwise I would have bought some ETF with my meager savings. Secretly I wish there would be another crisis again.

  7. Al Audet January 28, 2013 at 12:52 pm #

    @DaveL: Hallam has totally changed the way I look at the market now. My investment horizon is so long that I hate this current bull market. I wish it would tank. I also like the way Buffett puts it. Paraphrasing of course, but if you really want to buy cheeseburgers are you going to wait for them to go up in price and then celebrate when you bought them at their peak? If you want a cheeseburger you would like the price to go down. Equities are no different. If this market takes a nosedive I will be celebrating the sale of my bonds to put to good use.

  8. Canadian Couch Potato January 28, 2013 at 1:10 pm #

    It’s interesting to see how many people are now acknowledging that we’ve been in a bull market for four years now. This is a real change from about a year ago, when people were still hungover from 2008 and complaining that they were afraid to get back into equities until “things settle down.”

    I would caution investors who say they can’t wait for the markets to tank so they can start buying. First, bull markets can last for many years and the opportunity cost can be huge.

    Second, it’s much easier said than done. Go back and look at news stories from February 2009. Very few people were saying, “what a great opportunity.” They were screaming “somebody get me out of here because I can’t take it anymore.” Everyone talks about being greedy when others are fearful, but most of us end up just being fearful.

    A better approach is to simply have a long-term strategic asset mix and rebalance when appropriate. That takes the emotion out of it.

  9. Al Audet January 28, 2013 at 1:26 pm #

    @CCP: Always the voice of reason and calm. Point well taken. 🙂

  10. Dave L January 28, 2013 at 2:26 pm #

    @CCP: I agree that it’s a bad idea to sit on the sideline until another bear market, because of the opportunity lost, that’s why I jumped into the market last week, fully embracing passive investing. Reading Ferri’s “All About Asset Allocation”, it’s true that the only way to know your risk level is to experience a bear market. (Un)Fortunately I haven’t had a chance to experience it back in 08/09, but after reading more about passive investing, I think I’m well prepared now if another crisis emerge.

    Of course it might be different when shit REALLY hits the fan, that’s when investors are separated from panicking apes, and that’s when I see which group I belong to 🙂

  11. Dave L January 28, 2013 at 2:51 pm #

    One more thing that I want to add is that after learning passive investing, I’m not so afraid of buying when the market is down, because I’m buying the whole market. When I was investing individual stocks, it’s a scary feat to buy more when the stock took a dive, because I keep asking myself, will the company recover, or will it slowly die off.

    Take RIM for example, I know friends who had faith in it, and bought it on the way down from its peak, because they believe that they’ll dominate the smartphone market. Who would have thought that Apple and Android would devour Blackberry, and that RIM’s stock price was down to $6-7 last year. I thought RIM would go bankrupt, and it wasn’t until late last year that the stock is slowly climbing back to the current level.

    It’s different with Mr. Market. Unless there is Armageddon, or an ET invasion, the stock market won’t disappear. And with my investment horizon extended to decades, I’m much more comfortable with investing more in the market in the long run.

  12. Oldie January 28, 2013 at 3:18 pm #

    @CCP: My first greedy instinct on reading WB’s comment is, during a crash, to get whatever cash I can get and buy like crazy. But, I notice now, you and others actually said “Rebalance”, which is not exactly the same thing. As a couch potato, I think I should get that straight!

  13. J A H January 28, 2013 at 4:45 pm #

    The only thing I regret is dollar cost averaging into this bull market. But it kept my head level. Near the end the final purchase was that much easier to make. The math shows though that you should just move all your chips in at the start according to your asset allocation.

    No it’s just a matter of staying the course.

  14. Andrew F January 28, 2013 at 4:50 pm #

    The importance of diversification is not to be downplayed. Japanese investors are still experiencing the hangover from their equity bubble in the 1980s (when their market was epically overvalued on a CAPE basis). Japanese investors may have made out better had they been better diversified internationally.

  15. ApplePi January 29, 2013 at 11:48 am #

    @Andrew: One of the reason the Yen is considered a high-value currency is because the Japanese debt is effectively managed by the Japanese people. They put too much trust in their own government.

    Interestingly, when I tell people that Japan is a relatively cheap to live, they don’t believe me. The bubble-era stories of Japan being insanely expensive lasts a long time.

    We’re experiencing a similar thing in real estate in Canada. Prices have dropped considerably in the last year and likely have a ways to go, but buyers hold on to the illusion that it’s just a temporary bump and housing prices can’t possibly sink. I’m sure there is a lot of institutional money sitting on the sidelines. having finished pre-selling condos 2 years ago (still under contruction), who are waiting, like vultures, to grab land if (when?) it collapses.

  16. Andrew F January 29, 2013 at 12:11 pm #

    Japan’s equity market is just now getting to a reasonable level on a CAPE basis. I have no doubt that two decades of deflation can improve affordability.

    I definitely agree that perceptions take a long time to adjust. This is why people fall into ‘value traps’. Buying RIM at $60 is an example. This is why, when allocating your investments, it pays to keep an eye on valuations. Buffet would certainly agree.

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