Personal Finance

Warren Buffett's Most Important Lesson for Individual Investors

In this segment from the Industry Focus: Financials podcast, Gaby Lapera and Michael Douglass share what Berkshire Hathaway CEO Warren Buffett sees as one of the most important -- if not the most important -- lessons that new investors should be aware of. Listen in to find out how low-cost, passive indexing can be key to solid and reliable returns, and how investors can get started with such an investment.

A transcript follows the video.

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This podcast was recorded on May 2, 2016.

Gaby Lapera: What do you think was the most important thing Buffett said that individual investors should know about investing?

Michael Douglass: It's really ... I appreciate you asking that, because it's the easiest question for me to answer, and that's because Warren Buffett said, "The most important investing lesson you can learn right now ..." he very much telegraphed what exactly that was. He has this sort of long-standing, famous bet with Protege Partners, which he made back in 2006, and it's essentially -- which was over a decade predicting whether the cumulative returns of five hedge-funds picked or the S&P 500 Vanguard Index would win. Essentially, Buffett's on the one side saying, "Listen, passive, low-cost indexing wins against this sort of fee-heavy, hyperactive, hyper-reactive management style that hedge funds do." So far, it's not quite finished, but so far he's winning 3-to-1. We're talking 60-some-percent gains versus 20-some-percent gains. I want to say it was 21.9% return so far as the end of 2015, versus 65.7% on the S&P 500, showing that passive investing works. Really, it's not reacting to the day-to-day. It's not freaking out about what one quarter's earnings means or another quarter means but really just sitting, watching, and letting it ride.

Lapera: Yeah, and that's cool that you mentioned Vanguard. Vanguard is a very, very low-cost way to invest. Their fees are so much lower than competitors'. I think a lot of other funds, their fees run around 1%, which, when you're investing is huge. Vanguard is like 0.05, I believe, for their S&P.

Douglass: Yeah. It's a tremendously low-cost fund. The point that Buffett really made here was, for many investors, even for most investors, passive low-cost indexing is simply the way to go, because if you don't have the time to do Charlie Munger and Warren Buffett-style due diligence on a company, the answer really is something simple -- just not reacting and letting the growth compound over time.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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