In an insightful discussion, investment tycoons Warren Buffett and Charlie Munger shed light on various aspects of wealth management, philanthropy, and investing strategies. Particularly interesting is Buffett’s endorsement of a well-known investment vehicle for the average person. The S&P 500 index, favored for its diversification and reduced risk, is an effective strategy for those seeking financial security.
The conversation also navigates the complex waters of succession planning and legacy, revealing how two of the world’s greatest investors perceive and manage these issues. Let’s look into their thought-provoking discussion, where they recommend the best path for many non-professional investors striving for long-term financial returns and peace of mind.
Is Berkshire better than the S&P 500?
Berkshire has had a compounded annual gain of 19.8% from 1965 to 2022, compared with 9.9% for the S&P 500 during the same time.[1]
Not even Buffett is immune to the law of large numbers. The bigger something gets, the harder it is for it to keep growing exponentially. It will be very difficult to grow Berkshire Hathaway at the rate it did in the past. Let’s look at Buffett and Munger’s investing advice for the future.
Below is the transcript from Berkshire Hathaway’s Annual Shareholders Meeting in 2017.[2]
Becky Quick asked, “Why have you advised your wife to invest in index funds after your death rather than Berkshire Hathaway? I believe Munger has counseled his offspring, ‘To not be so dumb as to sell.'”
Warren Buffett: “Yeah.” (Laughter) “She won’t be selling any Berkshire to buy the index funds. All of my Berkshire, every single share, will go to philanthropy. So, I don’t even regard myself as owning Berkshire, you know, basically.” (Applause) It’s committed. And so far, about 40% has already been distributed.”
“So the question is, somebody who is not an investment professional will be, I hope, reasonably elderly by the time that the estate gets settled. And what is the best investment, meaning one that there would be less worry of any kind connected with and less people coming around and saying, ‘Why don’t you sell this and do something else?’ and all those things? She’s going to have more money than she needs.”
“And the big thing, then, you want is money not to be a problem. And there will be no way that if she holds the S&P — or virtually no way, absent something happening with weapons of mass destruction — but virtually no way that she won’t — she’ll have all the money that she possibly can use.”
“She’ll have a little liquid money so that if stocks are down tremendously at some point, there’s — they close the stock exchange for a while, anything like that — she’ll still feel that she’s got plenty of money. And the object is not to maximize. It doesn’t make any difference whether the amount she gets doubles or triples or anything of the sort. The important thing is that she never worries about money the rest of her life.”
“And I had an Aunt Katie here in Omaha, who Charlie knew well, and worked for her husband, as did I. And she worked very hard all her life. And had lived in a house she’d paid, I think, I don’t know, $8,000 for at 45th and Hickory all her life. And because she was in Berkshire, she ended up — she lived to 97 — she ended up with, you know, a few hundred million.”
“And she would write me a letter every four or five months. And she said, ‘Dear Warren, you know, I hate to bother you. But am I going to run out of money?'”
“And — (laughter) — I would write her back. And I’d say, ‘Dear Katie, it’s a good question because, if you live 986 years, you’re going to run out of money.'” (Laughter)
“Then, about four or five months later, she’d write me the same letter again. And I have seen there’s no way in the world if you’ve got plenty of money, that it should become a minus in your life. And there will be people if you’ve got a lot of money, that come around with various suggestions for you, sometimes well-meaning, sometimes not so well-meaning.”
“So if you’ve got something certain to deliver — you know, it was all in Berkshire, they’d say, ‘Well, if Warren was alive today, you know, he would be telling you to do this.’ I just don’t want anybody to go through that. And the S&P will be a — I think actually what I’m suggesting is what — a very high percentage of people should do something like that.”
“And I don’t think they will have as — I think there’s a chance they won’t have as much peace of mind if they own one stock. And they’ve got neighbors and friends and relatives that are trying to do some — like I say, sometimes well-intentioned, sometimes otherwise, to do something else. And so I think it’s a policy that’ll get a good result and is likely to stick. Charlie?”
Charlie Munger: “Well, as Becky said, the Mungers are different. I want them to hold the Berkshire.”
Warren Buffett: “Well, I want to hold the Berkshire, too.” (Laughter)
Charlie Munger: “No, but I mean I don’t like the — I recognize the logic of the fact that that S&P algorithm is very hard to beat. You know, diversified portfolio of big companies. It’s all but impossible for most people. But, you know, it’s — I’m just more comfortable with the Berkshire.”
Warren Buffett: “Well, it’s the family business.”
Charlie Munger: “Yeah.”
Warren Buffett: “Yeah. But it — I’ve just — I’ve seen too many people as they get older, particularly, being susceptible and just having to listen to the arguments of people coming along.”
Charlie Munger: “Well, if you’re going to protect your heirs from the stupidity of others, you may have some good system. But I’m not much interested in that subject.”
Warren Buffett: “OK.” (Laughter)
Key Takeaways
- Planning for your legacy: Buffett clearly states his intention to divert his entire ownership of Berkshire Hathaway towards philanthropic endeavors.
- Financial peace of mind: The importance of formulating a robust financial plan that secures ample wealth to cover future needs, thereby reducing money-related anxieties, is emphasized.
- Simplified investing approach: Buffett advocates investing in a broad, diversified portfolio such as the S&P 500 for consistent returns, particularly for those who aren’t professional investors.
- Guarding your wealth: Both investment experts underline the necessity to shield one’s assets from potentially poor advice or self-serving recommendations from others.
- Preference for familiarity: Despite recognizing the advantages of a diversified portfolio, Munger is inclined to hold Berkshire Hathaway stock due to his comfort and familiarity with the company.
Conclusion
Investment maestros Warren Buffett and Charlie Munger impart wisdom about wealth preservation, succession planning, and investment methodologies. The crux of Buffett’s advice points towards an investment strategy designed for peace of mind, which involves utilizing a specific, diversified investment vehicle that lessens financial concerns. On the other hand, Munger highlights the importance of sticking to what one knows best, despite acknowledging the logic behind Buffett’s suggestion. Their dialogue underscores the importance of tailoring financial strategies that protect one’s wealth, ensure a surplus to cater to their needs, and defend against potentially lousy advice. Pursuing financial tranquility rather than aggressive growth may result in a more comfortable and worry-free life.