In 2005, The Wall Street Journal published a story titled, Warren Buffett’s Bed & Breakfast. The headline grabbed a few eyeballs. It looked like Buffett dished out stock tips over pancakes–after offering travelers a bed.
I had sent Warren Buffett a postcard. I had written it in front of my 11th grade English class to show how quirky requests sometimes gain attention. At the time, I owned about $200,000 in Berkshire Hathaway shares. On the postcard, I had written that I planned to fly to Omaha to attend Berkshire Hathaway’s annual general meeting. “There aren’t any hostels in Omaha,” I wrote, “so I was wondering if I could sleep in your garage or on your living room sofa.”
Warren Buffett responded. He sent the postcard to The Wall Street Journal. They wrote the story. I didn’t sleep in his garage. I stayed at the Holiday Inn. But I did meet Warren Buffett.
I also continued to purchase Berkshire Hathaway shares. I was–and continue to be–a Warren Buffett fan. But in January 2011, I sold every share. At the time, they were worth almost $400,000. I added the proceeds to my position in Vanguard’s Total Stock Market Index ETF.
That might sound crazy. After all, Berkshire Hathaway had long stomped the U.S. market. In the previous 20 years, a $10,000 investment in Berkshire Hathaway shares would have grown to $176,594. If the same $10,000 were invested in the S&P 500 it would have grown to just $57,247.
I used to read every book that I could find about Warren Buffett. Every year, I devoured his annual shareholder letters. I wrote about Buffett for financial magazines. My bedtime reading included Lawrence Cunningham’s, Essays of Warren Buffett. I wasn’t a casual fan. I was fanatic.
Warren Buffett’s 1984 essay The Super Investors Of Graham and Doddsville was much like my bible. It said investors could beat the market if they followed a set of rules.
In 2010 I began research for my book Millionaire Teacher. At the time, my portfolio consisted of individual stocks and index funds. But the research was clear. Few people beat the market over time. It was easier in the past, when fundamental techniques were far less refined.
Larry Swedroe and Andrew L. Berkin explained this in their 2015 book, The Incredible Shrinking Alpha: And What You Can Do To Escape Its Clutches. The authors have a lot of respect for history’s great investors. “They were decades ahead of their time. They learned that you could beat the market by picking small stocks or value stocks or quality stocks with increasing price momentum.” But today, most active managers know that. Swedroe and Berkin say the market has changed. “Today, professional investors account for as much as 90 percent of stock market trading. And each decade, they get better and more sophisticated.”
Warren Buffett says that size also matters. As Berkshire Hathaway grows, he says it will have a tougher time beating a stock market index. Since I sold my shares in January 2011, Berkshire Hathaway has continued to soar. But as you can see by the image below, my total stock market index is going toe-to-toe.
Warren Buffett says he has never recommended Berkshire Hathaway shares. But he does recommend index funds. In 2008, he bet Protégé Partners that they couldn’t select a group of hedge funds that would beat the S&P 500 over a ten-year period. With just one year left on the bet, the S&P 500 has a massive lead.
Since 2008, even Berkshire Hathaway trails the U.S. index.
Today, I don’t own individual stocks. It might sound boring. But I find excitement elsewhere. With a low-cost portfolio of index funds, I might even beat the great Warren Buffett.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat.