In an insightful discussion, investment tycoons Warren Buffett and Charlie Munger shed light on various aspects of wealth management, philanthropy, and investment strategies. Especially interesting is Buffett’s endorsement of a well-known investment vehicle for the common man. 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 succession, revealing how two of the world’s greatest investors understand and manage these issues. Let’s take a look at their thought-provoking discussion, where they recommend the best path for many non-professional investors who strive for long-term financial returns and peace of mind.
Is Berkshire better than the S&P 500?
Berkshire has a compound annual gain of 19.8% from 1965 to 2022, compared to 9.9% for the S&P 500 over the same period.[1]
Even Buffett is not 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 has done in the past. Let’s take a look at Buffett and Munger’s investment advice for the future.
Below is the transcript from Berkshire Hathaway’s 2017 Annual Shareholders Meeting.[2]
Becky Quick asked, “Why did you advise your wife to invest in index funds after your death rather than Berkshire Hathaway? I believe Munger advised his descendants, ‘Not to be so dumb as to sell.’
Warren Buffett: “Yes.” (Laughter) “He’s not going to sell any Berkshire to buy an index fund. All of my Berkshire, every share, goes to philanthropy. So, I don’t consider myself a Berkshire owner, you know, basically. (Applause) It has been assured. And so far, about 40% has been distributed. “
“So the question is, a person who is not an investment professional, I hope, who will be old at the time when the land is settled. And what is the best investment, which means that there is little concern about even what kind of connected little people come and say, ‘Why don’t you sell it and do something else?’ and all those things? He’s going to have more money than he needs.”
“And the big thing, then, is that you want money not to be a problem. And there’s no way that if he’s holding the S&P – or almost no way, nothing happens with weapons of mass destruction – but there’s almost no way that he can’t – he’s going to get all the money he can he can use. “
“He has a little liquid money so that if the stocks go down too much at some point, there — they close the stock exchange for a while, anything like that — he’ll still feel like he has a lot of money. And the goal is not to maximize. It makes no difference whether the amount he gets is double or triple or whatever. The important thing is that he doesn’t have to worry about money for the rest of his life.”
“And I have an Aunt Katie here in Omaha, who Charlie knows very well, and works for her husband, like me. And he worked hard all his life. And lived in a house that he paid for, I think, I don’t know, $8,000 on 45th and Hickory all his life. And because he was in Berkshire, he ended up – he lived to be 97 – he ended up with, you know, a few hundred million.
“And he writes to me every four or five months. And he said, ‘Dear Warren, you know, I don’t want to bother you. But will I run out of money?’”
“And — (laughter) — I’ll write him back. And I say, ‘Dear Katie, this is a good question because, if you live to be 986 years old, you’re going to run out of money.’” (Laughter)
“Then, about four or five months later, he wrote me the same letter again. And I see that there is no way in the world if you have a lot of money, that it will be a minus in your life. And there are people when you have a lot of money, who come with different proposals for you, sometimes well-intentioned, sometimes not so well-intentioned.
“So if you have something sure to deliver — you know, it’s all in Berkshire, they’ll say, ‘Well, if Warren were alive today, you know, he’d tell you to do it.’ I just don’t want anybody to go through that. And the S&P is going to be a — I think actually what I’m suggesting is — a high percentage of people are going to have to do something like that.
“And I don’t think they can have that – I think there’s a chance they don’t have a lot of peace of mind if they have a stock. And they have neighbors and friends and relatives trying to do some – as I said, sometimes the intention is good, sometimes not, to do something else. And that’s why I think it’s a policy that gets a good result and is likely to stick. Charlie?”
Charlie Munger: “Well, like Becky said, the Mungers are different. I want them to keep Berkshire.
Warren Buffett: “Well, I want to hold Berkshire too.” (Laughter)
Charlie Munger: “No, but I mean I don’t like the — I know the logic of the fact that that S&P algorithm is very hard to beat. You know, diversified portfolio of great companies. It’s all but impossible for most people. But, you know, it’s – I’m more comfortable in Berkshire.
Warren Buffett: “Well, this is the family business.”
Charlie Munger: “Yes.”
Warren Buffett: “Yes. But this – recently – I have seen a lot of people as they get older, especially, who are easily influenced and have to listen to the arguments of people who come.
Charlie Munger: “Well, if you protect your successors from the stupidity of others, you might have a good system. But I’m not very interested in that topic.”
Warren Buffett: “OK.” (Laughter)
Key Takeaways
- Planning for your legacy: Buffett has clearly stated his intention to transfer his entire ownership of Berkshire Hathaway to philanthropic endeavors.
- Financial peace of mind: The importance of creating a solid financial plan that ensures sufficient wealth to cover future needs, thereby reducing money-related worries, is emphasized.
- Simplified investment approach: Buffett advocates investing in a broad, diversified portfolio such as the S&P 500 for consistent returns, especially for non-professional investors.
- Protect your wealth: Both investment experts emphasize the need to protect one’s assets from potentially bad 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 because of his comfort and familiarity with the company.
Conclusion
Investment gurus Warren Buffett and Charlie Munger provide wisdom on wealth preservation, succession planning, and investment strategies. The core of Buffett’s advice focuses on an investment strategy designed for peace of mind, which includes the use of a specific, diversified investment vehicle that minimizes financial worries. On the other hand, Munger emphasized the importance of following what one knows best, despite acknowledging the logic behind Buffett’s suggestion. Their dialogue highlights the importance of tailoring financial strategies that protect one’s wealth, ensure enough to meet their needs, and protect against potentially bad advice. Pursuing financial peace instead of aggressive growth can result in a more comfortable and carefree life.