“By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when “dumb” money acknowledges its limitations, it ceases to be dumb.”

— Letter to the Shareholders of Berkshire Hathaway Inc., 1993.

“Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund.

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.

The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds”

— Letter to the Shareholders of Berkshire Hathaway Inc., 2016.

“That’s the “what” of investing for the non-professional. The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’ observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better longterm results than the knowledgeable professional who is blind to even a single weakness.

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”

— Letter to the Shareholders of Berkshire Hathaway Inc., 2013

Let’s sum this up:

• Unsophisticated investor (large or small) should buy low-cost passive ETF for broad equity market (e.g. S&P 500 Index).
• Most investors (professionals too) underperform the market (mentioned S&P 500 Index). Any investor following passive ETF will beat them.
• He is so much convicted about this strategy that he laid this down in his will for managing the cash for his wife after his death – 10% stays in cash and 90% goes to very low-cost S&P 500 Index fund.

That approach has many benefits!

1. Simple no-brain passive strategy to follow and outperform most of the market participants. You can’t screw that. Got the paycheck, take 10% of it or more, buy ETF. Done.
2. You avoid high fees! The cheapest ETFs for S&P 500 have cost ratio as low as 0.09% (e.g. ticker SPY). Active strategies (or other passive but more sophisticated) may have 2% management fees – it will consume big chunk of the profits, it’s visible especially in long term investments.
3. Time on the market, not timing the market – you follow monthly schedule for buying, no matter what. Stocks are falling? No panic, you are happy, you are able to buy more, because stocks are cheaper. Staying invested in the market over a long period typically yields better returns than attempting to predict market movements. Historically, markets have an upward trajectory over the long term, despite short-term volatility. You need immediate exposure.
4. Diversification  – yes! You buy entire stock market (S&P500), single stock problems are not a problem for you. Also, Index is doing selection work for you – weak stocks are excluded from the index and good ones are included. Best performers (e.g. Nvidia recently) are getting biggest share in the index and your results.
5. Tax Efficiency– taxes are always tricky, unstandardized across the countries and individuals, also details matters a lot. However, in general passive investing is much more tax-efficient. Moreover, I suggest to invest in ETF accumulating one – dividends are not paid out to the investors, but rather reinvested within ETF. This means, no taxes paid until you sell the ETF! You can invest 40 years and not paid any taxes from dividend income or capital gains. (Keep in mind, some countries are discussing potential taxes on unrealized capital gains also – sic! – but this will hit everyone.).

The Real Cost of Active Investing

I know some will still try anyway to actively beat the market. What’s wrong with that? There’s some! Take a look:

1. Cash drag.

Following above passive approach means: you got paycheck, you invest right away. You have money, you go to the market. Your time on the market is maximized. Once you actively trying to be better then market and timing the market, you need to hold some cash (and earn lower returns). You can try to hold no cash and just switch investment once better one show up, but your transaction costs double this way.

2. Overconfidence, overtrading, overconcentration – game OVER!

Let’s talk about psychology (really). You say you can beat the market, right? Hm, why?

Let’s face the true. In most cases, you can’t. This is a fact. If you think you can, this is most probably due to overconfidence. This is known emotional bias and means: “investors demonstrate unwarranted faith in their own intuitive reasoning, judgment, and/or cognitive abilities.” (CFA Curriculum, Level 3, Year 2024 “Active Equity Investing: Strategies”). This bias leads to:

• Overtrading – you see so many opportunities (and partially you are forced to it to mitigate cash drag), so you trade them and trade them a lot. You pay excessive transaction costs, reducing your net returns and increasing the likelihood of making errors.
• Overconcentration – You place large bets on a few positions because you’re overly confident in your picks. This lack of diversification can lead to significant losses if those bets don’t pay off.

Overconfidence can be your downfall. Acknowledge it, address it, and don’t let it ruin your investment strategy.

3. Taxes.

You picked correctly and sold your stock with solid profit? Congrats. Now you need to take some profits and pay taxes on that. That is less efficient than passive buy-and-hold.

Okey, but why exactly retail investment industry is screwed?

Building a house is nothing more than laying bricks and mortar

Buy a cheap broad market ETF every month and just hold it.

It doesn’t sounds like advice you’d be willing to pay for, does it? Yet, that’s the best investment advice. And that’s my advice for you. If you start meddling, you’ll likely miss market returns, succumb to FOMO buying or panic selling at the worst moments, incur higher taxes and transaction costs, and experience higher stress levels.

The core problem is: Simplicity Doesn’t Sell

Imagine you want to build a house and you consult construction experts – an engineer, a builder, etc. You ask them for advice, and they say, “Sir, just buy mortar and bricks. Lay a brick, put mortar on it, then another brick, and keep going like that. Don’t complicate things, because it will only get worse. Stick to this method and don’t change.”

It sounds absurd, doesn’t it? Building a house is a complex endeavor, requiring attention to critical aspects such as safety (e.g., ensuring water and electrical installations aren’t too close to each other) and other important issues (e.g., foundations, insulation, ventilation).

However, in the investments that’s how it is – the simplest solution is the best! And it can be summarized in one sentence.