Larry Swedroe, who is considered one of the most respected market researchers, believes that Warren Buffett’s investment style is no longer working well.
It reports the number of professional Wall Street firms and hedge funds now participating in the market.
“Warren Buffett was generally considered the greatest stock picker of all time. And what we’ve learned in academic research is that Warren Buffett really wasn’t a great stock picker,” Swedroe told CNBC’s “ETF Edge” this week. “What Warren Buffett’s ‘secret sauce’ was, he figured out 50, 60 years before all the academics what these factors were that allowed you to earn outsized returns.”
Swedroe said index funds can help investors trying to emulate Buffett’s performance.
“[Investor] Cliff Asness and the team at AQR did excellent research and showed that the leverage that Buffett applied through his reinsurance company revealed. If you bought a stock index that had the same characteristics, you would have essentially matched Buffett’s returns,” Swedroe said. “Now, any investor can own through ETFs or mutual funds the same types of stocks that Buffett has bought through companies that applied this academic research — companies like Dimensional, AQR, Bridgeway, BlackRock, Alpha Architect and some others”.
Swedroe is the author and co-author of nearly 20 books — including “Enrich Your Future – The Keys to Successful Investing,” which was released in February.
In an email to CNBC, he called it “a collection of stories and analogies … that help investors understand how markets really work, how prices are set, why it’s so hard to consistently outperform through active management [stock picking and market timing,] and how human nature leads us to make investment mistakes [and how to avoid them].”
During his interview on “ETF Edge,” Swedroe added that investors can also benefit from momentum trading. He argues that market timing and stock selection often do not affect long-term success.
“Momentum is definitely a factor that has worked over the long term, although it goes through some big periods where everything else underperforms. But momentum works,” said Swedroe, who is also head of economic and financial research at Buckingham Wealth Partners . . “It’s purely systematic. Computers can run it, you don’t have to pay big fees, and you can access it with cheap momentum.”
In his latest book, Swedroe likens the stock market to sports betting and active managers to bookies. It suggests that the more investors “play”—or invest—the more likely they are to underperform.
“Wall Street needs you to trade a lot so they can make a lot of money on bid-ask spreads. Active managers make more money by making you think they’re likely to outperform,” Swedroe said. “It’s practically impossible mathematically for that to happen because they just have higher expenses, including higher taxes. They just need you to play, and so, you know, that’s why they tell you that active management is the winner’s game.”
“Stupid Retail Money”
He sees active management becoming more effective at attracting emotional investors – whom he calls “dumb retail money”.
“[Emotional investors] do it badly [that] they underperform the very funds they invest in because they pick the wrong stocks and time the market wrong,” Swedroe said.
