Warren Buffett discovers the EMH

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway (BRKA) shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) My advice to the trustee could not 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 suggest Vanguard’s. (VFINX)) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers.

Source.
(HT: Stephen Kirchner)

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19 Responses to Warren Buffett discovers the EMH

  1. Alfonso

    “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 — whether pension funds, institutions, or individuals”

    Warren’s feeling depressed.

  2. Dan

    To be fair part of his MO has been to have enough equity to help direct his companies’ operations. Perhaps his family don’t have that ability or interest.

    (Almost) all my shares are in index funds though.

  3. Ant

    “…could not be more simple”?

    I beg to differ.

    Here’s how to simplify it some more.

    “My advice to the trustee could not be more simple: Put 10% of the cash in Ant’s bank account and the other 90% in the same account.”

  4. Bruce of Newcastle

    Not sure where the EMH comes into it. But it does indeed show he knows that fund managers are overpaid and underqualified.

  5. Token

    One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway (BRKA) shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.)

    Was he last year grandstanding about “rich” people “not paying their fair share of taxes” to get his clients in the D’rats reelected?

    Typical crony capitalist hypocrit.

  6. Token

    Warren’s feeling depressed.

    No, he is telling us the truth.

    He knows his heirs have not been involved in the strong client network he has established with his long history with the Washington Post, other media holdings so they will be protected super rich who the D’rats ignore in their war on the rich.

    Therefore, he knows it is not possible they will make extraordinary gains from the crony type transactions he is famous for.

  7. Joe Goodacre

    As Bruce says, I don’t think the EMH is related at all.

    If Buffet believed in the EMH then BH and its above average returns for 30 years wouldn’t exist.

    This is horses for courses.

    An index fund is his standard recommendation for anyone who is not going to actively invest.

  8. pseudonym

    Sinclair,

    The title to your post is so wrong that it is bordering on delusion.

    WEB has repeatedly advised people that, should they have say 9 hours per week to spend on investing, to “go for it”; if not, they should invest in an index fund.

    Likewise, Charlie Munger, WEB’s “partner” as he calls him, has frequently referred to index funds as being for “know nothings”.

    Your illogical attempts to popularise EMH cause me to be nearly beside myself with frustration. I have more profitable things to do with my time. I will now add your website to my internet blocking program, so that I can never visit again.

    Before I leave, let me just say: When you look at the mediocre returns from your favourite index fund, I ask you to bear in mind that my private investment company has been earning an average of 28% (pre tax) per annum over the last 5 years, simply by taking advantage of the stupidity caused on the stock exchange by those who subscribe to EMH.

  9. Sinclair Davidson

    I will now add your website to my internet blocking program, so that I can never visit again.

    If the zero-price entertainment isn’t to your satisfaction, please be my guest and don’t return.

  10. Gab

    I will now add your website to my internet blocking program, so that I can never visit again.

    Gawd, what a drama queen.

  11. Infidel Tiger

    I will now add your website to my internet blocking program, so that I can never visit again.

    You obviously have control problems. I suggest an index fund is your best investment option.

  12. I am the Walrus, koo koo k'choo

    Pseudonym, pal, chill out.

    The EMH is to Sinclair as anthropogenic global warming is to Michael Mann.

    They are beyond the reach of reason. Best just to let them be.

  13. Joe Goodacre

    I repeatedly see the market being efficient in the long run (which is painful when that means prices of the things you sell are going down). Between particular participants and in shorter time frames though, the market can be wildly inefficient and these can consistently be turned into above average profits.

    I’m not sure what theory that fits into, but it’s life.

  14. brc

    Buffet is famous for hitting out at pseudo science which most readers take to mean EMH. Certainly his wealth would be a particularly strong point of evidence that EMH is a nice theory but bears little relation to the real world, particularly when defenders insist that anyone who gets rich like buffet does so through luck rather than an ability to consistently beat the market.

    This looks like a rational move to me – otherwise known as cutting off the grandkids to prevent his good name being trashed. These days the chances of spawning a paris Hilton who – though successful inher ownendeavours – doesn’t exactly bring about a high value for family brand.

    The worst thing that could happen to the buffet family fortune is a descendent decided they inherited the skill and surrounding themselves with yes-men and getting rid of the lot. So a smart move all round I think.

  15. Andrew

    WEB assumes that he’s picking the correct beta then, even if he doesn’t believe in alpha. 90% in the S&P500. As opposed to the MSCI World. Or the Russell Microcap. Or any of the real index / smart beta thingys. Or a MSCI EM index fund. Or a geared equity fund.

    We had a thread a while back heaping shit on BT – rightly so at the time, as Caton was beclowning himself about the World’s Biggest Carbon Tax. But it came up that I not only used BT on PA, but also one of their active high fee funds. This concept was apparently so alien to Cats that it was like I told them I had joined the Green Party.

    As of last night, I’m up +34.17% after fees in said fund, in the financial YTD (about 8 months).

  16. Bons

    who employ high-fee managers.
    Therein lies the issue. You successfully raise children, you are successful in a career, you are a good smart bloke, WFT cannot you look after your own finances without employing some spiv who came bottom of your high school class.
    Index funds will be most rewarding for your great grandchildren – or perhaps not.
    If you mow your own grass, look after your own finances. It’s easier!

  17. I am the Walrus, koo koo k'choo

    Andrew – caning it! – good on you!

  18. murph

    Well well well. He has absolutely no idea. The Yale model for trust investment absolutely smashes the S&P for many reasons:
    Country risk
    Non diversifiable single market risk
    Currency risk
    Maximum drawdown
    Etc
    I could go on
    Anyone who invests 90:10 is a clown

  19. murph

    Index funds track the market down. WTf is the point of that? If you’re going into index funds at least employ a momentum and/or trend strat to get out of the index while it’s bottoming out, or if the implied vol is exploding

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