Why does the world's greatest stock-picker recommend index funds for 90%+ of investors, including his wife? The answer is simple and makes sense if you don't have the time to do the kind of research he does.
A full transcript follows the video.
This video was recorded on May 8, 2017.
Gaby Lapera: Warren Buffett is really big on index funds.
Michael Douglass: Yeah. Actually, the 2016 shareholder letter, which was released a couple months ago, there was a whole section devoted to just Jack Bogle. And Jack Bogle actually came in and attended the annual meeting.
Lapera: Can you tell listeners who Jack Bogle is?
Douglass: Jack Bogle is the founder of Vanguard.
Lapera: Who we all have a huge crush on. [laughs]
Douglass: Yes. He pioneered the low-cost index fund. Buffett argues, I think correctly, that's he's basically done more for investors than anybody else alive, because he's been able to help investors cut out tens of billions of dollars in fees by moving to index funds.
Lapera: Low-cost index funds.
Douglass: Precisely. So Bogle was there, and Buffett got a question about why he's advised his wife, after he passes, to buy index funds. And he said, basically, for 90% or so of investors who aren't interested in doing the kind of work and due diligence and spending the time to really understand businesses, index funds give you broad diversification, A, and B, you don't have to be stressed about a specific business, because it's an index fund of the entire market. The implication was sort of, "If you're not really that engaged, don't buy Berkshire (NYSE: BRK-A) (NYSE: BRK-B); buy index funds."
Lapera: Yeah. Although some people would argue that you're better off buying Berkshire than your average single stock, like a Google or an Apple, just because Berkshire is very diversified as a single stock, because they own all these brands that you mentioned earlier that are in all sorts of different spaces.
Douglass: Yeah, I think that's a fair enough argument. I would say, on the flip side, people who put their entire portfolio in one stock, it's generally not a good idea. I would cede to Buffett on this one and say, if it's one stock or an index fund, buy the index fund.
Douglass: If it's multiple stocks, and you're willing to do the time and due diligence and research and take your lumps when you miss, then I think -- I'm an individual stock investor, you are, too -- it's kind of what we do here at The Motley Fool.