Our investment philosophy focuses on buying shares in companies that own strong brands. We hold onto these shares for a long time; a type of passive investing. Buying into index funds is often considered passive investing too.
What are index funds?
Index Funds are a portfolio of shares made up of companies that fall within a certain index or category. These categories can be based on any number of criteria such as geography, an industry (like mining or industrial) or a financial index (like the S&P 500).
The S&P 500 is one of the world’s best-known indexes, any index fund based on the S&P 500 will buy shares to mimic the index as closely as possible. Indexes are typically based on rules, not stock picking based on analysts’ opinions.
Warren Buffett on Index Funds
Many people quote Warren Buffett as saying; “Consistently buy an S&P 500 low-cost index fund,” Warren Buffett on CNBC’s On The Money
When the world’s greatest investor says buy index funds, the world takes notice. However, there is a significant detail left out by journalists when subscribing this quote to Warren Buffett.
The portion of Buffett’s statement left out is discussed below.
- Buffett’s statement was made in the context of choosing your investment vehicle. He said that if you are considering unit trusts, a managed pension fund or a hedge fund, you should rather be buying an “S&P500 low-cost index fund”.
- His point was that most investment vehicles that people select are detrimental to their long-term wealth creation. The reason is that investment professionals use strategies that attempt to profitably buy and sell shares when managing these investment vehicles.
- He is of the opinion that you should determine your sphere of skill, buy shares in companies that fall into this sphere of expertise and hold them for the long-term. This deep understanding of companies you invest in is also known as your “circle of competence”.
- “Consistently buy” – notice, he does not say “buy and sell”. Buffett’s focus is on buying not selling. His focus is to understand a company and buy it when others are selling it. He advocates avoiding a buy and sell strategy.
Does Warren Buffett invest in Index Funds?
Buffett has often compared the performance of his company to that of the S&P500 since inception. He has outperformed this Index by a massive 1,960,000% (One Million Nine Hundred and Sixty Thousand Percent). He has never and will never invest in an Index fund. Buffett believes that you should only:
“Invest in Index Funds if you have no knowledge of how companies work”
Buffett’s successful investment strategy focuses on understanding a company’s intrinsic value, buying as many shares as possible and holding them for a very long time. Only if you are unable to determine a valuable company and hold its stocks for a long time should you consider buying into an Index Fund.
At AXIAM, we dedicate our days to understanding the businesses we invest in, with particular focus on their future prospects. We care deeply about the ability of the companies we invest in to provide shareholders a growing income through increasing dividends. Our goal is to convert our clients’ current capital into an annual dividend and we carefully select companies that meet this criterion.
We focus on companies that own strong brands that are known and used daily all over the world. We also have a thorough understanding of those company’s profits and debt ratios and how they are likely to grow over the next 10 years. We do not limit ourselves to an industry or geography but focus on companies that have customers all over the world.
Once we buy shares in a company we do it with the intention of holding onto those shares for at least 10 years or preferably more. This not only keeps costs to a minimum but it allows us to build wealth through dividend income and the magic of compounding. That is our manner of passive investing and it looks very similar to that of Warren Buffett and his partner Charlie Munger.
Our investment philosophy, strategy and our ability to act rationally in turbulent markets creates the opportunity for us to outperform leading index funds over the long- term. Our focus is to convert our client’s current capital into an annual dividend.
If you would like to build wealth over the long term, sign up to our newsletter or follow us on Twitter to learn more about investment in the best global brands or contact our fund management team to invest.