Warren Buffett is one of the world's greatest investors. He has an extraordinary record of identifying businesses with strong compounding potential and owning them for the long term. But he isn't known for being an exchange-traded fund (ETF) investor.
Sure, he hasn't gotten every single investment right, such as Tesco or airlines. But, he has made enough right decisions over the decades to make Berkshire Hathaway into one of the world's biggest and greatest businesses.
I like the approach that Warren Buffett has taken with many of his investments.
But, I think that as one of the world's leading stockpickers, it's worthwhile looking into what his opinion on ETFs is considering the passive nature of many ETFs.
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Buffett's advice for the public about ETFs
According to commentary by my American Foolish colleague, Keith Speights:
In Buffett's 2013 letter to Berkshire Hathaway's shareholders, he wrote about how he and his longtime business partner Charlie Munger evaluate stocks. After this discussion, though, he noted that most investors don't need to do what he and Munger do.
Buffett rightly pointed out, "In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts)." He stated that non-professionals should simply invest in a cross-section of businesses and that "a lost-cost S&P 500 index fund will achieve this goal." An index fund, as the name implies, simply holds all of the assets in the index that it attempts to track.
How serious was Buffett about this recommendation? He even put similar instructions in his will for how his cash should be invested for the benefit of his family. Buffett revealed that his will stipulates that 90% of the money should be invested in a low-cost S&P 500 index fund with 10% in short-term government bonds.
For investors on the ASX, the type of investment that would be the equivalent on the Australian Stock Exchange would be iShares S&P 500 ETF (ASX: IVV).
What's in the iShares S&P 500 ETF?
Blackrock, the provider of this ETF, touts three compelling reasons to consider the fund.
First, it provides exposure to large, established US companies.
Next, the investment access it provides to the top 500 US stocks in a single fund.
Finally, it can be used to diversify internationally and seek long-term growth opportunities in a portfolio.
It owns names like Apple, Microsoft, Amazon, Tesla, Alphabet¸ Berkshire Hathaway, Johnson & Johnson, PayPal, Adobe, Visa, Mastercard and Home Depot.
What does Warren Buffett think about investing at times like this?
In 2001 Warren Buffett said the following:
To refer to a personal taste of mine, I'm going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the 'Hallelujah Chorus' in the Buffett household. When hamburgers go up in price, we weep. For most people, it's the same with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don't like them anymore.
In other words, I think he'd be very interested in looking at investing in shares on the ASX because of the selloff.
