Warren Buffett makes the case for doing what he says, not what he does

Sam Ro · Contributor

Mon, May 3, 2021, 3:11 AM 5 min read

Picking stocks is so hard, even Buffett makes mistakes

"I recommend the S&P 500 index fund and have for a long, long time to people," Berkshire Hathaway (BRK-A, BRK-B) CEO Warren Buffett said at the company's annual shareholders meeting on Saturday.

"And I've never recommended Berkshire to anybody because I don't want people to buy it because they think I'm tipping them into something."

Sure, Berkshire is a massive $630 billion conglomerate with all sorts of businesses under its umbrella. But in the investor community, the company is best known for its $282 billion stock portfolio. A portfolio overseen by Buffett, who is widely considered to be the greatest investor of all time thanks to his stock-picking prowess.

And so no matter what Buffett says, there will always be those who will attempt to mirror his performance by tracking his public statements and monitoring Berkshire's regulatory filings.

If you followed Buffett's advice and bought the index last year you probably aren't complaining: the S&P outperformed Berkshire by 16 percentage points in 2020.

Still, none of this is going to stop people from questioning and criticizing Berkshire's various trades.

Buffett and Munger acknowledge poorly timed trades

The first shareholder question during the meeting's hours-long Q&A was about Buffett's decision to dump airline shares at their lows early on during the COVID-19 pandemic — shares that have generated extraordinary returns in the year since Buffett disclosed the sale.

Buffett went into detail about how those airlines may have actually benefited from Berkshire's sale as it potentially accelerated financial support from the government. But his fundamental reasons for selling haven't changed.

"I still wouldn't wanna buy the airline business," he said.

But he didn't shy away from the point of the question, which was why Berkshire appeared to be "fearful when others were greedy." In fact, he actually reminded the audience that Berkshire also trimmed its stake in banks, which have also outperformed the market in the past year.

"Looking back, you know, it'd have been better to be buying," Buffett admitted. "I do not consider it a great moment in Berkshire's history. But also we've got more net worth than any company in the United States under accounting principles."

Of course, these market bottoms only become clear in hindsight. And Buffett's right-hand man Charlie Munger made a blunt point about that.

"It's crazy to think anybody's going to be smart enough to husband money, and then just come out on the bottom deck in some crazy crisis, and spend it all," Munger said in response to a question about why Berkshire wasn't more acquisitive in March 2020. "There always is just some person that does that by accident. But that's too tough a standard. Anybody who expects that of Berkshire Hathaway is out of his mind."

And so while Buffett and Munger might take pride in investing in good businesses that eventually generated attractive returns, they're not exactly aiming to buy at bottoms and sell at tops.

'A great argument for index funds'

Prior to the Q&A, Buffett shared two slides in an exercise illustrating how difficult it is to pick winners in the stock market.

The first slide listed the world's 20 largest companies as measured by market capitalization as of March 31, 2021. It included familiar names like Apple (AAPL), Saudi Aramco, Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG, GOOGL), Facebook (FB), Tencent, and Tesla (TSLA) at the top.

"How many of those companies are going to be on the list 30 years from now?" he asked. "What would you guess? Think about that yourself."

He then followed that with a slide listing the top 20 companies from 1989.

"None of the 20 from 30 years ago are on the present list," he said. "None. Zero."

Warren Buffett gives a clinic on picking stocks at Berkshire Hathaway's annual meeting. (Yahoo Finance) · Yahoo Finance

"It is a reminder of what extraordinary things are going to happen," he said. "We were just as sure of ourselves as investors and Wall Street in 1989 as we are today. But the world can change in very, very dramatic ways."

To be sure, Buffett's slides included a lot of non-U.S. names that you'd never find in an S&P 500 index fund. But his general point is that you're better off investing broadly than putting all your money into what appear to be the winners.

"It's a great argument for index funds," Buffett added. "The main thing to do was to be aboard the ship."

To further his point, he also made the case for why it isn't even enough to know which industries will boom versus bust. He noted that the emerging U.S. auto industry of the early 1900s eventually saw over 2,000 auto companies formed.

"Of course, you remember that in 2009, there were three left — two of which went bankrupt," he said. "So, there is a lot more to picking stocks than figuring out what's going to be a wonderful industry in the future."

During the shareholders meeting, Buffett repeatedly reiterated his recommendation for investors to buy index funds over picking stocks like he does. As Myles Udland puts it: "The advice from Buffett, as always, is do what I say, not what I do."

Though as Buffett said this weekend, "It's not as easy as it sounds."

By Sam Ro, managing editor. Follow him at @SamRo