Warren Buffett may be the best investor – ever. But while Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) shareholders have been handsomely rewarded over the past 49 years, the Oracle of Omaha has different strategy for his own will. Here's what you need to know.
Don't buy Berkshire Hathaway?
Since Buffett Partnership Ltd. acquired Berkshire in 1965, business has been booming. In 48 full financial years, Warren Buffett has delivered positive annual earnings for all but two years. Shares soared as much as 59.3% in a single year (1976), but more importantly, Buffett has consistently beat his benchmark.
From 1965 to 2013, Berkshire Hathaway's compounded annual gain comes to 19.7%, compared with just 9.8% for the S&P 500 (SNPINDEX:^GSPC) – and that includes Fortune 500 dividend payouts. In the past 20 years, Berkshire Hathaway shares have soared more than 1,000%, more than twice the S&P's returns.
But despite ridiculous returns, Buffett isn't trusting Berkshire Hathaway with one cent of his estate. When he bids his final farewell, the Oracle of Omaha has different plans for his portfolio.
Keep it simple, stupid
Warren Buffett's latest Berkshire Hathaway letter to shareholders spells out his post-mortem plans, plain and simple:
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.
While Buffett undoubtedly wishes Berkshire Hathaway all the best, he's keeping investing easy for his wife -- and his advice is excellent.
We all want to be good investors. Heck, we all want to be outstanding investors. But the truth is, many "market masterminds" consistently underperform Mr. Market.
According to Standard & Poor's, 84% of U.S. stock fund managers failed to match the S&P 500's 2.1% returns in 2011. A study by Vanguard Group found that, over a longer 20-year period, 72% of managed funds underperformed their respective benchmarks. In the past five years, hedge funds' collective $2.5 trillion portfolio has underperformed the simplest S&P 500 index fund.
Analyst ratings didn't help, either. According to Bloomberg, the 50 worst-rated stocks in 2012 soared 23% -- outperforming the market by 7 percentage points.