Buffett's Enduring Belief: Why the S&P 500 Index Becomes the Top Investment Choice
The "Oracle of Omaha" Warren Buffett has repeatedly emphasized at the annual meetings of Berkshire Hathaway:
"I think the best thing for most people is to own an S&P 500 index fund."
"People spend a lot of money buying stock-picking advice, but they don't need it. If you bet on America and hold your position for decades, then your return will be much better than buying Treasury bonds, and much better than those who follow stock-picking advice."
Over the 25-year period from 1993 to 2018, he recommended the S&P 500 a total of 14 times and even specified in his will that 90% of his personal fortune be invested in the S&P 500, fully demonstrating his trust in the long-term, stable returns of this index.
So why does this simple index win Buffett's such firm and enduring approval?
What is the S&P 500?
The S&P 500 index, akin to a "thermometer" for the U.S. stock market, is compiled by Standard & Poor's and tracks the performance of the stocks of the 500 most influential publicly listed companies in the United States. These companies span across various industry leaders, with their market capitalization determining their influence on the index.
The "Magnificent 7" globally renowned tech stocks—Apple (AAPL.US), Amazon (AMZN.US), Google (GOOGL.US), Meta (META.US), Microsoft (MSFT.US), Tesla (TSLA.US), and NVIDIA (NVDA.US)—are among the top-ranked in the index, and these companies accounted for 76% of the S&P 500 index's gain of over 20% in 2023.
The rise and fall of the S&P 500 index directly reflect the overall trend of the U.S. stock market. In fact, investing in the S&P 500 index means that investors allocate their funds to a portfolio deeply tied to the performance of the overall U.S. economy. Thus, it can be said that investing in the S&P 500 is essentially betting on the developmental potential and long-term prosperity of the American economy.
How is the investment performance?
Buffett once said, "People prefer to have a lottery ticket for a big prize next week rather than grasp an opportunity to get rich slowly."
Over the past 5 years, 10 years, and even 20 years, the S&P 500 index has demonstrated outstanding returns among many asset classes worldwide, not only outperforming the stock markets of Europe and Asia but also those of emerging markets.
Historically, the S&P 500 index has been profitable over every 20-year period. Its average minimum return over 20 years is 5.62%, and the average minimum return over 25 years is 9.07%. Moreover, the actual return approaches the average as the investment period extends. From January 1928 to December 2023, a total of 1152 months, it achieved a positive return in 682 of those months.
Taking a real-world example, if $1 was invested in the S&P 500 index on January 1, 1970, by the end of 2020, the final return, including dividends, would be approximately $191.89, with an annual compound return rate of 10.43%.
Figure: Historical Performance and Annualized Return Rates
Looking at the historical performance on a monthly basis, the S&P 500 Index typically delivers positive returns in most months of the year. Despite a common belief that there is a summer slump, with the adage "sell in May and go away," the S&P 500 Index actually tends to maintain a good upward momentum during the summer months.
On the other hand, the "September Effect" is a real phenomenon, where the S&P 500 Index often experiences a significant decline in September. However, the following months usually see a strong rebound, potentially benefiting from factors such as holiday spending that boost the market. Therefore, for investors, understanding this seasonal trend can help them make decisions in September, such as holding cash in preparation to buy stocks at lower prices.
Figure: Average Monthly Returns of the S&P 500 Historical Performance
What products are available?
ETFs (Exchange-Traded Funds) linked to the S&P 500 provide a one-stop low-cost solution. For example, SPY has an expense ratio of only 0.09%, which is much lower than the 1-2% fees typically associated with stock transactions or mutual funds, making it a very cost-effective option.
Buffett believes that this passive investment approach is very suitable for average investors, not only saving time on researching individual stocks but also potentially more profitable, making it suitable for investors who intend to invest in U.S. stocks for the long term:"What I've often recommended is low-cost S&P 500 index funds, but very few of my modest friends believe me. Almost no extremely wealthy investor, fund manager, or pension fund has truly followed my advice. They politely thank me but then are convinced by asset managers charging high management fees to choose a different investment approach."
Well-known S&P 500 ETFs available on the U.S. market include:
1. $SPDR S&P 500 ETF(SPY.US$: Commonly referred to as the "Spider," SPY is one of the first and most well-known S&P 500 index ETFs on the market. Managed by State Street Global Advisors, it was launched in 1993 and is not only one of the largest exchange-traded funds in the world but has also been a widely used investment tool for U.S. large-cap stocks among investors. SPY is highly liquid with enormous daily trading volumes, which allows investors to easily buy or sell, and the bid-ask spread is typically very tight, which is particularly advantageous for large volume traders.
2. $iShares Core S&P 500 ETF(IVV.US$: IVV is an ETF issued by iShares, a division of BlackRock, which also aims to track the performance of the S&P 500 index. The expense ratio for IVV is even lower than that of SPY, at around 0.03%. While IVV may not have as high liquidity as SPY, its average daily trading volume is still sufficient to meet the trading needs of most investors.
3. $Vanguard S&P 500 ETF(VOO.US$: VOO is an ETF managed by the renowned low-cost fund manager Vanguard Group, which also closely tracks the S&P 500 index. The expense ratio for VOO is typically around 0.03%, which reflects Vanguard's long-standing commitment to a low-cost investment strategy.
4. In addition to the three aforementioned ETFs that track the S&P 500 index, investors can also consider the $Proshares Trust S&P 500 Divid Aristocrats Etf(NOBL.US$: This is an ETF that selects "Dividend Aristocrats" (companies with a history of increasing dividends for at least 25 consecutive years) from the S&P 500 index as its constituents.
Summary
"In the short run, the stock market is a voting machine, but in the long run, it is a weighing machine." From a long-term investment perspective, the S&P 500 index offers an attractive risk-reward ratio that is hard to match for investors seeking to build wealth, making it one of the most compelling asset classes available.
Therefore, when constructing an investment portfolio, products related to the S&P 500 index can be an ideal choice for most investors, especially as a supplement or foundational allocation tool in addition to direct stock investments.
"Only when the tide goes out do you discover who's been swimming naked."
No matter how the market fluctuates, maintaining rational analysis and independent thinking, and adhering to the principles of value investing is the key to steady progress in any market environment.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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fish : This is a horrible article
And to anyone new at this
DATES ARE A VERY IMPORTANT THING when it comes to certain catalyst timing because the condition of the market has changed this meeting this man speak of is May 4, 2023. The annual meeting is always May 4 so this meeting for 2024 has not taken place so which means Berkshire Hathaway Omaha King has not said this yet, especially with a different conditions but I totally agree to the statement but the point being this is an old article he’s making reference
ASSAYER :
old or new it’s sound like good advice from someone who is in the game. I found it insightful.
102326071 : Can you actually vote?