Warren Buffett’s billions of dollars and stellar investing record have helped him transform into the business guru he is today. Often called the “Oracle of Omaha,” Buffett always seems to know which investment class is on its way up – or which business is undervalued and due for a rebound.
Because of his stunning success and reputation, Buffett is also well known for doling out some pretty amazing investing advice. His tip to “be fearful when others are greedy and greedy when others are fearful” is one of my favorites.
And, I love his advice to “put out the bucket, not the thimble” when it rains gold – as in, make sure you’re taking full advantage when something goes your way.
But, you know what? I’m not 100% sure I buy all of Buffett’s advice, mostly because he doesn’t follow it himself.
This is particularly true of Buffett’s advice to Americans regarding index funds.
During the financial crisis of 2008, Buffett’s famous letter in the New York Times offered plain insight into his advice.
“I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term,” Buffett wrote.
“Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: Put your mouth where your money was.
Today my money and my mouth both say equities.”
In 2007, Buffett even made a $1 million bet against hedge fund managers that said the Vanguard 500 Index Fund Admiral Shares, an index fund that tracks the S&P 500, would beat hedge fund returns that year.
He was right; by the end of the betting period, his chosen index fund had returned 7.1% while the hedge funds his competitor chose offered a return of just 2.2%.
For someone who has come out so publicly in support of index funds, you would think that’s where he throws all his money. But, if you do think that, you are absolutely wrong.
Take Buffett’s Index Fund Advice With a Grain of Salt
To understand Buffett’s “do what I say, not what I do” mentality, you have to go back to the beginning. According to legend, Buffett’s first investment wasn’t in index funds, but in preferred stock at age 11. After holding onto his small sum of stock until he could turn a profit and sell, Buffett was dismayed to find the value of his stock continued rising. This was one of the cursory lessons Buffett received on the value of patience in investing.
His first foray into investing may have helped support his “buy and hold” mentality, but Buffett didn’t become a billionaire by investing in index funds. Some of Buffett’s first big investments were into individual companies, such as the windmill manufacturing company he invested in in 1961. He also began investing in a textile manufacturing firm then called Berkshire Hathaway, before taking it over completely in 1965. Other big investments that catapulted Buffett to unthinkable riches include an early investment in American Express.
In 2008, when the stock market tanked and our country was in the thick of a life-changing recession, Buffett chose to invest $6 billion into General Electric (GE) stock. Buffett’s Berkshire Hathaway also invested $5 billion into fledgling Goldman Sachs toward the end of 2008.
During the aftermath of the financial crisis, Buffett also invested in several different companies, including the likes of Mars, Bank of America and Dow Chemical. The Weekreports that Buffett made $10 billion in the wake of the Great Recession alone, mostly by relying on his own advice to “be fearful when others are greedy and greedy when others are fearful.” While many investors were pulling out of the stock market altogether, Buffett was diving into individual companies head first.
It was just recently released that Buffett's own Berkshire Hathaway bought 75 million shares of Apple in the 1st quarter of 2018.
The bottom line: Buffett can espouse the virtues of index fund investing as much as he wants, but index funds aren’t the vehicle he used to build wealth. Buffett grew his famous pot of wealth by strategically investing in companies at the right time, not through index funds.
Is There Anything Wrong With Investing in Index Funds?
Before you get the wrong idea, please hear me out. I don’t think investing in index funds is a bad idea at all. By and large, buying index funds and holding them for the long run has been a winning strategy for investors. A fairly recent report from Standard & Poor’s even showed how S&P 500 index funds performed better than 92.2 percent of large-cap fundsover the last 15 years.
If your goal is saving for retirement, then yes, you should absolutely consider using index funds as the bulk of your portfolio – especially if you can choose low-cost index funds through a brokerage firm like Vanguard. With a decades-long history of winning returns and some of the lowest ongoing costs you can find, it would be hard to beat this strategy.
But, do you want to become rich? Now, that’s an entirely different question. While index funds offer one of the strongest long-term strategies to build enough wealth to retire, they won’t let you reach Buffett-level success because the process is much too slow.
3 Ways to Get Rich Without Index Funds
That’s why I don’t think you should listen to Buffett if your goal is becoming extremely wealthy. Remember, Buffett didn’t become a billionaire by buying index funds – he got rich by smartly investing his money and becoming a leader in the business world.
If you want to build your own fortune, you should follow the path Buffett and many other wealthy entrepreneurs have forged:
#1: Start a business.
Remember that Buffett started buying shares in Berkshire Hathaway early on, then moved into a leadership role by 1965. Ever since, Buffett has worked diligently to transform this firm into what it is today – a holding company that invests in hundreds of diverse businesses around the world. Berkshire Hathaway is not only at the core of Buffett’s success, but it is one of the main reasons he was able to build unthinkable wealth.
This shouldn’t really surprise you. If you really think about it, most of the truly wealthy people you know aren’t working for somebody else – they are business owners. They are individuals who have used their influence, business acumen, or investing prowess to take over or build companies they can utilize to grow their fortunes.
#2: Become an entrepreneur.
Step two to becoming insanely wealthy is becoming an entrepreneur. While many entrepreneurs are also business owners, most entrepreneurs got their start by inventing a product or launching a business that fills some sort of need. Thanks to the internet, many of today’s most successful entrepreneurs are also ones who figured out how to utilize technology to expand a business idea or make it better.
While plenty of entrepreneurs fail spectacularly, most of the world’s richest people are entrepreneurial in some way.
#3: Invest boldly.
When you think back to Buffett’s fairly humble beginnings, you must admit that Warren was "all-in" with his company. He wasn't diversified at all, which could have been a recipe for disaster.
But, you know what? Buffett had the courage to invest boldly, and his belief in himself paid off in a big way. Imagine if he hadn’t invested in Berkshire Hathaway or a small windmill farm, but in index funds instead. Buffett would be rich thanks to the passage of time, but he wouldn’t be who he is today.
Build Wealth Like Buffett?
If you’re angling to become rich à la Mark Zuckerberg or Warren Buffett, it’s going to take a lot more than index funds to get there. While you should definitely make sure you’re diversified and investing for the long haul, you’ll need to make some savvy business moves if you want outsized reward for your efforts.
Buffett can take big bets now because he has a ton of cash and years of investing experience most of us don’t. Still, we can learn from his willingness to take calculated risks.
These risks are the driver behind his success and his riches. Index funds, while valuable in their own right, had nothing to do with it.
