End of an Era: 3 Investment Lessons from Warren Buffett That Every Investor Should Follow
- BRK-B
- NVDA
The <a href="https://www.fool.com/investing/how-to-invest/famous-investors/warren-buffett-investments/?utm_source=yahoo-host-full&utm_medium=feed&utm_campaign=article&referring_guid=fcc01620-cb3c-4bfc-ae9a-450f6b7f2935″ rel=”nofollow noopener” target=”_blank”>Warren Buffett era at Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) has officially come to a close. After relinquishing the CEO spot at the start of the year, Buffett has also decided to step down as chairman. His son, Howard Buffett, who has been a director of the insurance conglomerate since 1993, will take over as chairman.
Nicknamed the Oracle of Omaha, Buffett is regarded as one of the world’s top investors. Let’s look at three lessons investors can take from him and apply to their investing strategy.
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Make an S&P 500 ETF a core holding
Despite being a great stock picker, Buffett is also a big fan of index investing. In fact, in 2007, he famously issued an open challenge that an investment in an S&P 500 (SNPINDEX: ^GSPC) index fund would beat a group of handpicked hedge funds over the next decade. Ted Seides of Protégé Partners took the $1 million bet, investing in five funds-of-funds, which are funds that invest in other funds.
The bet spanned from 2008 to the end of 2017. The hedge funds got off to a good start, as the S&P 500 index fell 37% in the first year, which was the start of the housing collapse. However, by the end of the 10 years, the S&P 500 had returned more than 125% versus a roughly 36% return for the hedge funds.
One of the big reasons Buffett was confident in his bet was fees. Actively managed funds eat up a lot of investor returns with high fees, while S&P 500 index funds generally have minuscule fees. This gives index funds a big advantage over time.
The other great thing about market-cap-weighted index funds is that they let their long-term winners ride, which is something Buffett is also famous for. For example, he’s held Coca-Cola (NYSE: KO) stock since 1988 and never sold a share. This flies in the face of how most professional investors operate, quickly selling winners and adding to losers.
My favorite S&P 500 index exchange-traded fund (ETF) to invest in is the Vanguard S&P 500 ETF (NYSEMKT: VOO), which has a slim 0.03% expense ratio and is easily traded.
Buy durable businesses with wide moats
Another great lesson from Warren Buffett is to buy stocks in companies with durable businesses and wide moats. These are the companies that compound their earnings over long periods of time and see their intrinsic values consistently rise.
