Invest in an Index Fund, Says Buffett

Warren Buffet, Peter Lynch, Charles Schwab, The Motley Fool, Knight Kiplinger and Jim Cramer are just some of the people who believe that index funds are a good investment, according to a FundAdvice.com article by Paul Merriman posted last week.

What is an index fund, you ask? It's a type of mutual fund, as Mr. Merriman explains:

An index fund attempts to replicate the investment results of a target index or an asset class by investing in all the securities in that index or in a portfolio that closely approximates the index. That gives investors the overall return of that particular index or asset class. And while “average” might not be your goal in most areas of life, actually achieving average market returns could make you an above-average investor.

Merriman goes on to state that index funds are cheaper, tax-efficient, and less risky. Furthermore, academic research indicates investors in individual stocks do not have as high of returns as the market average. With index funds, you get the "market average." While you may not see extremely high returns during a market upswing, your losses may not be as severe during a recession.

I found this article to be particularly intriguing to me personally because I was in the same room as Mr. Buffett in the fall of 2005, and he gave the same advice about index funds. He was visiting Medical Protective, which had just been acquired by Berkshire Hathaway, and I had just started my internship with the company.

Company profile: Cort

As I recently flipped through an issue of BusinessWeek, a two-page advertisement with Warren Buffett's picture caught my attention (a portion of this ad is pictured). It is a little unusual for a Berkshire Hathaway company to use Mr. Buffett as their spokesperson or to include his picture in an ad, so I was naturally curious about what this company did.

According to Cort's website, the company "has been helping companies and individuals manage change" since 1971. The company started out in the furniture rental business, but the company has become a little more diversified. Cort can assist a company with "total relocation solutions." Some services they provide include furniture rental and apartment locating. These services can be for employees that are moving across the country or just across town.

The 2,500 employees of Cort live by the motto, "Wherever you're heading, we'll be there." On the same website, Cort states that it became a part of the Berkshire Hathaway family of businesses in 2000.

Another point that Cort's website brings up is that Berskshire Hathaway is known for their corporate ethics. Berkshire also stays around "for the long term." I think that these are two very beneficial and attractive attributes for a company to have today. Ethics are obviously important in this post-Enron age, and company longevity leads to better job security.

Buffett: Railroads Are in a Better Competitive Position

Berkshire Hathaway has invested in three major railroads--Burlington Northern Santa Fe Corp., Union Pacific Corp. and Norfolk Southern Corp. As a result, the stock of all three companies is trading at 52-week highs. Associated Press business writer Josh Funk wrote about this latest move by Buffett in a May 22, 2007 article. One reason cited for this move is that railroads are nearly monopolistic because it is so expensive for a new company to build its own railroad network. Thus, it is relatively easy for existing railroad companies to maintain profitability.

Additionally, railroads provide transportation for a wide variety of goods. If demand for one type of good suddenly falls off, locomotives can easily move to other parts of the country to transport other goods. Furthermore, rising diesel prices might make train transportation cheaper than movement of goods by truck. A train with double-stacked containers is the equivalent of 220 semitrailer trucks. Because of all of these traits, Buffett believes the train industry is a better business than it used to be.

Photo by jimfrazier via Flickr

How High Can it Go?

(Click on graph to enlarge)

One of the most unusual things about Berkshire Hathaway is the very high price of its stock. Today's closing price was an astounding $109,000 per share, and, as indicated in the five-year graph above, that's not unusual. Most stocks you see on CNBC's ticker are trading somewhere below $100 and change by single-digit amounts. Not Berkshire Hathaway. Today, their stock went up by $649 per share. Of course, this represents a fraction of a percentage change, which is all that matters when you have stock in a company. Even still, the numbers seem astronomical.

These high stock prices are the result of Warren Buffett's philosophy of not splitting the stock. According his company's 1983 annual report, he seems to want to keep a certain class of investors and keep other types away. Mr. Buffett states:

Were we to split the stock or take other actions focusing on stock price rather than business value, we would attract an entering class of buyers inferior to the exiting class of sellers. At $1300, there are very few investors who can’t afford a Berkshire share. Would a potential one-share purchaser be better off if we split 100 for 1 so he could buy 100 shares? Those who think so and who would buy the stock because of the split or in anticipation of one would definitely downgrade the quality of our present shareholder group. (Could we really improve our shareholder group by trading some of our present clear-thinking members for impressionable new ones who, preferring paper to value, feel wealthier with nine $10 bills than with one $100 bill?)

Obviously, the company has some very high standards for the type of shareholders they want to attract.

The 2007 Annual Meeting

It has been called the Woodstock for Capitalists. The attendance at the Berkshire Hathaway annual meeting has grown to 27,000, which is an increase of 7,500 in the past decade. This year, the meeting opened on May 5 with a performance by Jimmy Buffett who joked that he was a distant cousin of Warren.

The official schedule for the weekend-long meeting included the showing of a company movie, a question and answer session, an international meet and greet, and a backyard barbecue at Nebraska Furniture Mart.

Berkshire Hathaway Profile

If you have never heard of Berkshire Hathaway before, you would not believe how powerful the company is if you just looked at their website. Their home page consists almost entirely of simple text and links, which is a very rudimentary site design by today's standards. However, the company has nearly fifty subsidiaries and is run by the world's second-richest person, Warren Buffett. The 76-year-old is worth $52 billion, according to a March 2007 article at Forbes.com.

Fort Wayne has a local connection to Berkshire Hathaway. Since 2005, the company has owned Medical Protective, a medical malpractice insurance provider headquartered in Fort Wayne.

This blog will explore Berkshire Hathaway, Warren Buffett, and some of the company's many subsidiaries. The annual shareholder's meeting and Buffett's massive donations have been among the hot topics in the past several months, and those will be detailed. I will also take a look at Buffet's history and how he got started in investments at a very early age.