Disagreeing With "The Oracle of Omaha" is Practically Sacrilegious... but I'm Doing It

Updated: Oct 15, 2020

Warren Buffett claims that if you invested $114 in the first quarter of 1942 in the S&P 500 Index - AND HELD IT - you would have over $400,000 today (1st Quarter 2018).


Let's take a look at those numbers, shall we? First, it's 76 years between 1942 and 2018. Here's the problem: demographics, political change, economic policies... all change the dynamics. It's so easy to look backwards and say "Here, do what I did and you'll be a successful investor."

But when everything changes, and it is changing more rapidly than ever before... we can't rely on old advice like this.

Second, the annual compounded rate of return would've been 11.33% AFTER expenses. It's important to make that distinction because expenses are always a factor when making investment decisions.

Now, Mr. Buffett DID say that big management or brokerage fees would eat up a lot of those returns. He said it as though it's Wall Street's fault for charging what they charge, but the marketplace changes over time.

Even today, you CAN'T invest directly into the S&P 500 Index. It's not possible. Today, the most popular way to invest as closely as possible is in an equity investment called an "Exchange Traded Fund" or "ETF". And they finally got traction going in the mid-90's or so. The SPY fund (the most popular way to "invest in the S&P 500 Index") got its start in 1993. It obviously wasn't around in 1942. https://en.wikipedia.org/wiki/Exchange-traded_fund

Mutual funds didn't really 'take off' until the 1950's or so. https://en.wikipedia.org/wiki/Mutual_fund

That means that back in 1942, you'd have to invest in each INDIVIDUAL STOCK of the S&P 500 index, and trade them out as the S&P 500 index would trade them - each trade having transaction costs. Unless you paid those transaction costs "out of pocket" they would continue to erode against your returns.

Now, I don't know what the average stock trade cost would be back then, but you could bet that it would eat up a LOT of that initial $114 and the ongoing returns since then.

So, what's my point: Some of these articles - even by world-class investors like Mr. Buffett - require a more "in-depth" look to evaluate the truth behind them. I cannot say that I would rival Mr. Warren Buffett's expertise in investing as he is one of the richest men in the world. But some advice articles, like this one, need to be examined more closely for the "holes" in the logic.

Today, there are new ways to get the upside of an underlying stock market index, without the downside risks. Strategies like this help to "lock in" your earnings and create more safety, security, and guarantees in one's total financial life.

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