“All you have to do is just buy a cross-section of America and then never listen to people like me or read the papers or do anything subsequently,” he said in an exclusive interview with Yahoo Finance’s editor-in-chief, Andy Serwer.
Buffett’s recommendation for capturing this “cross-section” is to invest in an S&P 500 (^GSPC) index fund like the Vanguard 500 (VOO, VFINX, VFIAX). In fact, Buffett once called Vanguard founder and index fund pioneer Jack Bogle a “hero” to investors.
Anyone questioning this call may want to consider the history. S&P 500 index funds have a long history of outperforming most actively managed funds, which aim to beat the index. In a high-profile, 10-year-long wager against the hedge fund industry, Buffett proved the difficulty of beating the S&P. (That said, past performance is no guarantee of future success.)
‘Moving around is not smart in investing’
Regarding blocking out investment pundits, Buffett encourages this because all the noise may tempt investors to frequently trade in and out of their stocks and funds.
“They think that because you can trade you should trade,” he added. “But you buy a farm, you buy an apartment house — you can't re-sell it tomorrow.”
One of the ways stocks are unlike farms and apartments is the transaction costs. They’re low.
“The costs of [trading stocks] are pennies compared to other kinds of investment activity,” he said. “So because they can so easily move around, they do move around. And moving around is not smart in investing.”
There’s a lot of literature showing that investors are terrible at timing the market, often selling when they should be buying and buying when they should be selling. As such, they’ll generate returns lower than they would be had they just bought and held an index fund.
This is a message Buffett has been preaching for a long time. In a 2017 interview with Yahoo Finance, he said, “People have certain habits, some proclivities that are self-destructive in investing. So I would say that I hope our main message is to stay away from trying to trade stocks or do things that are kind of self-destructive, and just let America do the work for ’em.“
Of course, when Buffett says “never listen to people like me,” he’s not referring to the advice he just provided. As the CEO of a major holding company, he often makes appearances in business news to discuss the investing activity of his firm. This information he provides is often not designed for the average investor.
Sam Ro is managing editor at Yahoo Finance. Follow him on Twitter: @SamRo