Warren Buffett's Advice to LeBron James Pays-off for Long-Term Investors
According to latest Dalbar QAIB study, the average equity fund investor underperformed the S&P 500 by nearly 3% points over the last 30 years.
To my fellow long-term investors,
The NBA is back. The stock market is down. My objective is to stay rational. This post was created to help you do the same. After all, we are in this together.
In 2015, during an appearance on CNBC, Warren Buffett gave some investing advice to NBA superstar LeBron James.
Think: VTSAX or VOO.
“…owning a piece of America diversified piece bought over time held for 30 or 40 years — it's bound to do well and the income will go up over the years and there's really nothing to worry about…nobody's ever followed that and gotten other than a decent result.”
I am sure LeBron James has a diverse portfolio of investments (not just stocks). But for his stocks, Buffett recommends the passively-managed, low-cost index strategy; the strategy made possible (and famous) by Jack Bogle.
Jack Bogle’s wisdom really works
In The Little Book of Uncommon Sense, legendary investor Jack Bogle writes:
“Gunning for average is your best shot at finishing above average.”
This wisdom remains true in 2023.
According to latest Dalbar QAIB study, the average equity fund investor underperformed the S&P 500 by nearly 3% points over the last 30 years.
What a difference 2.84% makes!
The idea of underperforming the index by this much gives me cold sweats. That’s because of the power of compound interest over a long time horizon.
If two investors start with $1,000,000, and achieve 30-year annualized returns of 6.81% and 9.65%, respectively…the difference in future value is massive.
But this should also motivate you: After all, by making a relatively small improvement to your long-term annualized returns, you will stand to gain massively.
It is a mathematical certainty.
Two investors (A & B) begin with the same starting capital and invest over a 30-year time horizon.
Investor B ends up with more than twice (+120%) than Investor A.
If improving long-term performance is this easy, why don’t more of us do it? I would argue that it’s too rational, and we are not rational enough, by nature. But the subject of Behavioral Finance offers more clues.
Read some of my favorite .PDFs on the subject here.
I’ll share more later this month with our Paid Members
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Consider This Analogy: Practically all of us know that we can improve our health by eating fruits and vegetables, but 90% of us fail to get our proper amount. How am I applying this to my own portfolio?
In 2022, I published a tweet stating that my aim was to have 70% of my equity portfolio in low cost index funds.
As of right now, 69% of my portfolio is in a combination of VTSAX and VOO.
I expect to surpass the 70% mark before the year is over. As a matter of fact, I am excited to buy more with the price dipping like it has been lately.
This might not be for you. I am certainly not saying you should follow my lead. But I will continue to share what I am doing (and why I am doing it) so you can get an alternative perspective from a real investor.
If LeBron took Warren Buffett’s advice…
Around the time of the interview, VOO 0.00%↑ was $190 per share.
The price is up about 104% over the last 8.5 years.
The avg. annualized return is more than 12%, based on my approximation.
It’s not NVIDIA, but it’s better than the average investor.
Always consider the counter-arguments
I am reminded of a great quote from my favorite investor, Charlie Munger:
“I never allow myself to hold an opinion on anything that I don't know the other side's argument better than they do.”
Let’s apply this…
Going back to the Dalbar Study, someone could easily make the following counter-arguments:
Past ≠ Future
Historical performance is not a definitive predictor of future results. Even if the S&P 500 doesn't hit 9.7%, it's plausible that most equity fund investors will continue to underperform it.
I am confident that future returns will be different, but human psychology will be the same. Even if the psychology improves, costs and fees will still take away from the future value.
International Exposure
Critics often point out that by favoring the S&P 500, one misses out on international market opportunities. However, it's key to note that many US-based enterprises listed on the index have significant global operations.
Plus, I've always believed in understanding my investments. Venturing into emerging markets or European indices doesn't align with that principle.
The Lure of Individual Stocks
Yes, there's always a chance to strike gold with individual stocks that skyrocket beyond the S&P 500. I've had my moments of glory with Apple, Facebook, and others.
But are these instances the norm or just outliers? More crucially, am I equipped mentally to weather the volatility storms these individual stocks may face over 30+ years? Past behaviors indicate I'm more unnerved by individual stock fluctuations than by the broader index's ups and downs.
If you are one of the 100,000+ people who follow my Instagram handle @CharlieMungerQuotes then you know Charlie believes index investing is for the “know-nothing” investor.
But this isn’t an insult. To be a know-something investor requires a considerable amount of time; time which most cannot spare.
The caption comes from one of our followers (a professional investor):
“For 99% of people, buy a US equity index fund. Add to it every single month and never sell it - is the best advice to give people. Adding to it every month is key. This reiterated many of Charlie’s points - it’s time arbitrage. It will go up over time. Be patient and just add to it in a regular systematized way. Ending up wealthy really is that easy.”
Thank you for reading my post!
Sincerely,
Chris Franco
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