Wanting to fund it like Buffett

Brian J. O'Connor
Detroit News Finance Editor

Americans are nervous about the stock market. In the past two months, investors pulled nearly $32 billion from mutual funds, according to the Investment Company Institute, as the market has swooned and soared to end last week barely above where it ended last year.

Dumping stocks isn’t the savviest move but who can blame us? If the market’s not up, it’s down, except for when it goes nowhere. It’s all very frustrating for investors faced with a do-it-yourself retirement who are supposed to magically become our own versions of Warren Buffett.

Warren Buffett, of course, is the World’s Greatest Investor Ever (WGIE), and also someone with whom I’ve had breakfast. Buffett took holding company Berkshire Hathaway from less than $8 a share in the 1960s to about $215,000 a share today. What, you ask, is his secret? After spending nearly two hours with him in person, I will tell you this: Warren Buffet does not appear to like English muffins.

But his portfolio isn’t toast

OK, the knowledge that Warren Buffet is short delicious toasted nooks and crannies won’t help your portfolio much, and neither will trying to invest like Buffett, unless you have loads of time to analyze companies, markets and economic trends. Of course, many investors do all that and THEY’RE still not Warren Buffett. This suggests that to really invest like Warren Buffett it would be extremely helpful to have Warren Buffett’s brain, which is unavailable, being currently in use.

When Buffett is done using his brain, his will indicates that the Oracle of Omaha doubts that others can repeat his impressive performance. Eric Balchunas noted at Bloomberg.com that Buffett’s last will and testament advises the trustee of his estate to put 10 percent of the money in short-term government bonds and 90 percent in a low-cost Standard & Poor’s 500 index fund.

“I believe the trust’s long-term results from this policy will be superior to those attained by most investors,” Buffett wrote.

This raises the question: Why is Buffett even bothering with a trustee, when he could just use the kid who cuts his lawn?

Buffett: Hey, Robbie, want to make another $2 an hour?

Robbie: Sure, Mr. Buffett. You want the gutters cleaned out again?

Buffett: Nah, just manage my estate after I die, OK? The whole thing is two mutual funds. It’ll take about 15 minutes a year, tops. It’s all here on this Post-It.

Robbie: Well, OK, but you still owe me 20 bucks for mulch.

I clipped the hedge (fund)

How does that two-fund strategy stack up? Let’s look at the ProShares Hedge Replication ETF, which tracks a broad index of hedge funds, those big, mysterious and expensive investments open only to rich people with the secret password. Between the beginning of 2012 and the end of 2015, the ProShares fund was up 7.5 percent.

Now let’s look at a portfolio — call it the “Buffett Index” — based on the S&P 500 index and the Barclay’s U.S. Treasury Index: it’s up 69 percent. That is much, much more, plus you don’t pay for some fund manager’s BMW.

For the five years ended in 2015, the Buffett Index would be up 74 percent, and for 10 years it would more than double your money, returning a gain of 102 percent. If you’d put $10,000 into that mix on Jan. 1, 2000 and rebalanced every New Year’s Day, you would’ve had nearly $20,000 at the end of last year, for a compound annual growth rate of 4.42 percent before incredibly low fees. Even after inflation, you’d still be up more than $6,000.

That’s not great when compared with the nearly 11 percent historical annual return of stocks, but the last 16 years covers the Tech Bust and the Great Recession, which put our imaginary Buffett Index in the red for a total of seven years since 2000.

Even after all that, Buffet’s two-fund strategy still comes out ahead, proving that it is, indeed, futile to try and invest like Warren Buffett. Just invest like the kid who cuts Warren Buffett’s lawn.


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Twitter: @BrianOCTweet

Brian O’Connor is author of “The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese.”