From Warren Buffett: Advice Helpful for an IRA Rollover

Posted on March 13, 2010 at 7:21 AM PST by

Warren Buffett is our generation’s Benjamin Franklin, a humble billionaire full of great advice, quips and invaluable insights. While he never gives direct investment advice, one can gleen some helpful hints about investing in one’s IRA Rollover account.

To paraphrase Warren, most investors should “do as I say, not as I do.” The world’s greatest investor warns us against trying to imitate his stock picking abilities. His unwavering advice for years has been to buy index funds because: a) very few people have it in their DNA to be a great investor, and b) those who charge you for their investment expertise can rarely outperform the market due to their onerous fees.

To bring home his advice we’ve pulled together a rare 8 minute Buffett video, evidence a $1 million bet he made, and a fable that he wrote.

A Fable. Read excerpts from Berkshire Hathaway’s 2005 and 2006 annual reports where Buffett describes what happens to the imaginary Gotrocks family when they begin taking help from Wall Street.

“…imagine for a moment that all American corporations are, and always will be, owned by a single family. We’ll call them the Gotrocks… In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious. But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others…. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend, and in a wide variety of ways, they urge it on.”

The $1m Wager. Buffett bet Protégé partners, a fund of hedge funds, $1,000,000 that over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses. Buffett’s bet is a bet on high fees. His view: regardless of how good the money managers are, the hedge fund fee structure is so high, that it will, over 10 years, wipe away any gains achieved from beating the market.

The Lecture. Warren Buffett spoke to a group of students at the University of Florida and answered questions for ninety minutes about his investment philosophy. Fast forward to the 1:15 minute mark on this great video where he says:

“If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than world, then I believe in extreme diversification. I believe that 98 or 99 percent – maybe more than 99 percent – of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs. All they’re going to do is own a part of America. They’ve made a decision that owning a part of America is worthwhile. I don’t quarrel with that at all – that is the way they should approach it.”

Just because you can pick up a golf club doesn’t mean you should bet all your savings on your getting on the PGA tour. And just because you (or someone in a suit at an investment management firm) can place a trade at an online broker, doesn’t mean you figure out a better strategy than using index funds in an asset allocation strategy for your retirement investing.

Do as I say, not as I do. Thank you Warren.