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Warren Buffett is almost universally recognized as the greatest investor of all time. The Oracle of Omaha has been President and CEO of Berkshire Hathaway (NYSE: BRK.A) since 1964. In fact, he had bought Berkshire Hathaway, a bankrupt textile factory at the time, out of spite – the former owner had escaped a young Buffett on a market and to avenge himself, he had bought the business out of him.
Since then, Buffett has turned Berkshire, a bankrupt company, into a real investor: a US $ 517 billion conglomerate with significant holdings in a wide variety of US companies, including Apple, Coca Cola, American Express and Bank of America. To achieve this, it has achieved an average annual rate of return of 20% since 1964, more than double the market average.
And yet, his best investment advice for "most people" is to simply buy an S & P 500 index fund. No more and no less.
So, why does the biggest active investor tell most people that they should not even try to do what he does?
Well, because most people are not. But he's a cop. There are many investors who are doing very well, outperforming your conventional index funds. But many others do not – there are statistics that show that the majority of investors who try to invest and choose themselves (as well as fund managers) do not achieve this goal.
There are several reasons why – some people are afraid when their shares sell and sell at the wrong time, or otherwise pay too much for companies on which they should have expected a better price. Others simply do not research and do not understand the companies they buy.
Human emotions prevail at some point in the lives of investors. That's why Warren Buffett thinks most of them would be a lot better by buying the market and continuing on the right track.
Take away
I think Warren Buffett has a very deep point. Many investors end up making the wrong choice, lose money and, instead of learning from their mistakes, give up. Others repeat their mistakes, become emotional and regularly underperform the market.
Of course, you will not really know if you have what it takes for at least a few years, so a good strategy might be to protect your bets: invest in an index fund like iShares S & P 500 ETF (ASX: IVV) or even a local version like the Vanguard Australian Equity Index ETF (ASX: VAS) alongside individual stock choices and see what happens.
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Sebastian Bowen, contributor for Motley Fool, does not hold any position in any of the actions mentioned. Motley Fool Australia does not own any of the shares mentioned. We fools may not all have the same opinion, but we all agree that taking into account a wide range of ideas makes us better investors. Motley Fool has a disclosure policy. This article contains only general investment tips (under AFSL 400691). Authorized by Scott Phillips.
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