Warren Buffett loves index funds. He famously said that, upon his passing, he wants the bulk of his assets to be put into low-fee index funds for his wife.
Little work, little knowledge needed, and you get the average return of the market. That’s the basic idea. For someone like his wife, with little knowledge of the markets, it’s simple and time-tested strategy to make your money work for you.
But it’s not how he did it himself. Buffett didn’t rise from a relatively modest background to multi-billionaire status through index funds. Granted, they didn’t exist in those days. The earliest of these funds date back to the 1970s.
Big returns
But even today, Buffett prefers active investment over passive investment. Why? Because of the chance of market-beating returns. His holding company Berkshire Hathaway has netted near 20% returns for over half a century. That sounds like it’s worth the effort, for some people at least.
Where would Buffett get started today? He’d probably look at beaten down stocks, fallen share prices and sectors that have suffered a bit of a tailspin. He’d look for cheap stocks, basically.
In his own words, “Most people get interested in stocks when everyone else is”.
It’s human nature to follow a crowd and in many walks of life it’s a material advantage. But in the stock market, following what everyone else is doing can be like the lemmings walking off the cliff. Not a good idea.
Expanding on the above quote, Buffett says, “The time to get interested is when no one else is. You can’t buy what is popular and do well”.
Plenty of UK stocks have shown this to be true of late. Airlines took a hit after Covid. Was there an opportunity there? I’d say so. The businesses weren’t harmed outside of an increase in supply costs. What’s more, flying is more popular than ever.
Today’s opportunities
British Airways owner IAG has reaped the rewards, its shares doubling in value over the last year or so.
Buffett isn’t a fan of airlines for their unpredictability but I think he’d accept there was value there.
Is there anything like that today? One stock that stands out to me in this regard is Diageo (LSE: DGE). The drinks seller has seen a slump in sales while navigating a leadership change. The shares have lost nearly half their value in the last three years or so. All this while its flagship brand Guinness is booming so much the firm is facing calls to divest it into a FTSE 100 business all of its own.
Coincidentally, Warren owns this stock already, the only British company in the Berkshire portfolio. I own it too and am happy with the size of my position but any further drop in price and I may have to increase that. Buy low, sell high, as they say. Well, this might be a buy low moment.
