Since buying his first stock at age 11, Warren Buffett has amassed $90 billion in wealth and become one of the best-known figures in finance. Buffett's ability to pick winning investments is nothing short of extraordinary, and Berkshire Hathaway (BRK.A 0.30%) (BRK.B 0.33%) has achieved immense success under his leadership. In fact, Berkshire stock skyrocketed more than 3,600,000% between 1964 and 2021, and Buffett had racked up more than $177 billion in unrealized gains through Berkshire's portfolio as of June 30, 2022.

With credentials like that, it's no surprise that Buffett has become a legend in his own time. Upward of 40,000 people flock to Nebraska each year to attend the annual Berkshire shareholders meeting, eager to hear Buffett -- known as the "Oracle of Omaha" -- share his thoughts on investing philosophy and the broader economy.

Naturally, Buffett has offered up many pearls of wisdom over the years, but one piece of advice is particularly relevant right now.

Person wearing suit looks dejected while holding box

Image source: Getty Images.

Warren Buffett made a big bet in 2007 (and won)

Buffett issued a challenge to the investing world in December 2007. He wagered $500,000 that no professional investor could select a set of five hedge funds -- actively managed investment products with high fees -- that would outperform a passively managed S&P 500 index fund over the following 10 years.

Only one advisory firm, Protégé Partners, accepted that challenge. The firm tasked five professional investors (each of whom employed dozens of investing experts) with managing one hedge fund a piece. In total, Protégé had 200-plus hedge fund managers bent on beating Buffett.

The bet started in January 2008 -- as the S&P 500 was collapsing under the weight of the Great Recession, an event that ultimately erased 56% of its value -- and it ran through December 2017. Buffett emerged victorious, and he won by a wide margin. The S&P 500 delivered a total return of 125.8% during that period, while the best-performing Protégé fund was up just 87.7%. It's worth noting the worst-performing Protégé fund did so poorly it was liquidated in 2017.

An S&P 500 index fund is a great option for most investors

Investors can learn a lot from that story. Buffett beat hundreds of highly-trained professional investors, and he beat them without doing any work. A passively-managed S&P 500 index fund simply mirrors the composition (and therefore tracks the performance) of the S&P 500. Meanwhile, Protégé had hundreds of hedge fund managers actively buying and selling investments throughout the 10-year period. They did a lot of work, and they achieved a worse result.

That anecdote explains why Buffett has consistently recommended a low-cost S&P 500 index fund for most investors. In 2017, he urged investors to "keep buying [an S&P 500 index fund] through thick and thin, and especially through thin."

That advice is still relevant today -- in fact, it's especially relevant in this challenging environment. High inflation and rising interest rates have sent the stock market tumbling, and the S&P 500 is currently 25% off its high. That puts the index in a bear market, or a clear example of the "thin" times Buffett previously mentioned, and investors would do well to take Buffett's advice regarding an S&P 500 index fund.

Another option for investors

Over the past decade, Berkshire Hathaway stock has virtually mirrored the performance of the S&P 500. But Berkshire stock has a five-year beta of 0.89, meaning it tends to rise and fall less dramatically than the overall market. That makes Berkshire stock a reasonable investment option for Buffett fans who find an S&P 500 index fund a little too volatile.

Berkshire has accumulated a number of businesses that operate across several critical industries, including insurance company GEICO, railway operator Burlington Northern Santa Fe, and industrial specialists Precision Castparts and Lubrizol, among others. Berkshire also own 92% of Berkshire Hathaway Energy, which itself has several subsidiaries involved in electricity and natural gas utilities.

That diversification makes Berkshire financially resilient. Case in point: It has increased free cash flow per share at 6% annually over the past 15 years, despite weathering a couple of recessions during that time. Of course, no company is immune to an economic downturn, but Berkshire’s resilience is an advantage in the current environment.

In addition, the company has over $105 billion in cash and short-term investments on its balance sheet. That war chest leaves Buffett with plenty of capital to deploy should he come across any bargain investments in the bear market.

Of course, investors don’t have to choose between an S&P 500 index fund and Berkshire. It’s OK to own both -- I doubt Buffett would disapprove.