This story is part of The World-Herald's special section on the Berkshire Hathaway annual shareholders meeting. Find the complete section in Saturday's World-Herald and on Omaha.com. Find a single-copy location.
Index fund investors in March followed Warren Buffett's advice to the tune of about $1 billion.
That's how much more people invested in the Vanguard 500 Index Fund, compared with a typical March, after Buffett mentioned the fund by name March 1 in the Berkshire Hathaway Inc. annual report. That is 300 percent more than in a typical March.
When he dies, Buffett told shareholders in his annual letter, cash will be delivered to a trustee for his wife, with the advice that the trustee put 10 percent in short-term government bonds and the remaining 90 percent in a “very low-cost S&P 500 index fund.”
Live coverage: Our live chat begins at 7:30 a.m. and continues through the question-and-answer session with Warren Buffett and Charlie Munger. At 5 p.m., join a post-meeting chat with World-Herald Berkshire Hathaway reporter Steve Jordon. Omaha.com/Berkshire
Berkshire Hathaway events in Omaha
7:30 a.m. to 4:30 p.m.: Berkshire Hathaway/Brooks 5K packet pickup at Hilton Omaha; in-person registration accepted.
9:30 a.m. to 4 p.m.: Annual shareholders meeting. (Doors open at 7 a.m., movie at 8:30 a.m., followed by the Q&A at 9:30 a.m. Booths representing more than 40 companies open in the Exhibition Hall throughout.)
Noon to 4:30 p.m.: NetJets display of aircraft at Signature Flight Support next to Eppley Airfield. Stop by the NetJets booth for shuttle information.
5:30 p.m. to 8 p.m.: Berkshire's Big League Picnic for shareholders at Nebraska Furniture Mart, 700 S. 72nd St. Live entertainment from DJ's Dugout's Blazin' Pianos with food from Famous Dave's, Domino's, Sonic or Paradise Bakery & Cafe.
8 a.m. to 11 a.m.: Berkshire Hathaway "Invest in Yourself" 5K presented by Brooks. The course starts on 10th Street across from the CenturyLink Center Omaha and ends on Riverfront Drive. In-person registration accepted.
9 a.m. to 4 p.m.: Borsheims shopping day for shareholders. Brunch begins at 9 a.m.
1 p.m. to 10 p.m.: Private shareholder event at Gorat's Steakhouse, 4917 Center St. Reservations required.
4 p.m. to 10 p.m.: Private shareholder event at Piccolo's Steakhouse, 2202 S. 20th St. Reservations required.
Last day of Nebraska Furniture Mart special shareholder pricing.
Last day of Borsheims special shareholder pricing. Credentialed shareholders also can receive up to 20 percent off at the new Borsheims Boutique at Nebraska Crossing Outlets in Gretna.
“I suggest Vanguard's,” Buffett wrote.
The Vanguard 500 was the first index mutual fund, introduced in 1976 by Vanguard founder John Bogle. Today the fund has $165.5 billion in assets, making it the third-largest equity fund available, according to Vanguard.
The initial spike in online searches for the fund — as much as a 450 percent increase for the term “Vanguard 500 Fund” — has settled down, but the recommendation generated wide coverage among the financial press, bloggers and general-audience publications.
“He's such a legend that his advice will resonate for years. Our funds will benefit from his support for a while,” Vanguard Chief Investment Officer Tim Buckley said. He said the firm did not know in advance Buffett would mention it, but that the recommendation affirmed Vanguard's strategy.
“He's arguably the greatest investor to walk this earth,” Buckley said. “Mr. Buffett knows how hard it is to outperform the market.”
It wasn't the first time Buffett has singled out the fund. The Vanguard 500 Index Fund is the investment he backed in a 10-year bet against New York asset manager Protege Partners, which bet on a group of five hedge funds.
Buffett took the bet to demonstrate that a passively managed fund with low fees is typically a better investment in the long run than an actively managed fund where managers must not only try to beat the market, but also beat it by enough to overcome the “frictional” costs of trading incurred along the way.
An index fund tracks the movement of a market index, such as the S&P 500, by holding shares in amounts proportionate to their market-cap weightings in the index, said George Morgan, finance instructor at the University of Nebraska at Omaha, who is a proponent of the funds.
There are hundreds of available index portfolios. Besides tracking the S&P 500, other index funds track groups of small-cap, international or emerging markets funds, or bond indexes. Some funds combine two or more index funds for more diversified investment.
Advantages include little active trading, resulting in low fees and little capital gains to pay taxes on, Morgan said.
As Buffett said in his annual letter, “The 'know-nothing' investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.”
How is the bet working out? While the hedge funds took an early lead in the 2008 wager, six years in, at the end of 2013, the index fund was up 43.8 percent, while the Protege funds were up an estimated 12.5 percent, Buffett's friend Carol Loomis reported in February in Forbes.
But there are many index funds that track the S&P 500, so why name Vanguard's?
“Its reputation among people who accept passive invest approaches is huge,” Morgan said, for its low expense ratio and its record of how closely it tracks the market.
Investors who want to follow Buffett's advice have a few choices for how they buy into the Vanguard S&P 500 fund.
They can buy “investor shares,” which require a minimum investment of $3,000 and have an expense ratio of 0.17 percent.
If they have at least $10,000 to invest, they qualify to buy Admiral Shares, which have an even lower expense ratio, 0.05 percent.
Or they can buy and sell any amount of shares in the Vanguard S&P 500 exchange-traded fund at market price through a brokerage firm. Shares in an exchange-traded index fund also mirror the larger index but can be bought and sold like a single stock.
Vanguard said the index approach initially was called “un-American” and people said it “guaranteed mediocrity.” Enthusiasm for index funds grew in the 1990s among retirement plan managers and do-it-yourself investors and, since the Great Recession, among financial advisers, Buckley said.
William Callahan, a fee-only financial adviser in Omaha, said the fund is a “common security” for his firm to recommend amid a larger conversation with clients about “just how valuable an index fund can be.”
Beyond interest generated as a result of Buffett's letter, Callahan has seen a growing trend of more interest in index investments among his established clients and among new clients.
But Callahan and other advisers cautioned that the typical investor not put all her eggs in this one basket of funds — or even 90 percent of those eggs, as Buffett will for his wife, Astrid — especially once they reach retirement age.
“You still need to follow other rules of investing, like diversifying among different sizes of stocks,” Callahan said.
The S&P 500 fund, like the index itself, has gone up and down like a roller coaster in recent years, said Brad Grubb, managing director and securities principal at Manarin Investment Counsel. He said many investors are not willing to take that ride and may prefer working with an adviser who can give them direction during market disruptions.
Ten thousand dollars invested in the Vanguard 500 Index Fund in 2004 would have been worth about $7,200 in late 2008, but would be worth more than $20,000 today, Vanguard said.
Indexing works, Grubb said, only “so long as investors remain fully invested and are prepared to weather significant swings in the market,” and not sell when things look rough.
Astrid Buffett likely would have a portfolio sizable enough that even a big market plunge would leave her with plenty to live on, said Ron Carson, founder of Carson Wealth Management Group in Omaha. But putting 90 percent in a single fund is bad advice for the typical investor, who “should have a variety of strategies,” Carson said.
Still, Carson said that he is a “huge admirer” of Buffett's and that his clients might be surprised to hear him say that for many investors, indexing is a good strategy, helping them to avoid financial services representatives who sell products “laden with a lot of nontransparent fees.”
While Carson said his firm invests in a variety of strategies to balance risk, he said, “Odds are slim that you're going to find one that has put (in) the time and the research to give you a real chance at outperforming the market.”
The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.