NASDAQ 5000 and Warren Buffett’s Advice

The NASDAQ hit 5,000 today.  It briefly went above 5,000 back in early 2000, right before the tech bubble came crashing down.  It started going back up and then fell back again in late 2008.

It’s hard to believe that the index went from below 1,500 in 2009 to over 5,000 today.

We do have to consider that the index is still way off its all-time highs in real terms.  Since 2000, consumer prices have risen approximately 35% according to the government’s CPI inflation calculator.

We also don’t know if this is a bubble that is about to pop.  I am pretty certain it is a bubble, but we haven’t seen the parabolic stage yet.  It’s possible we could still see some huge gains before the big fall.

If you invested in nothing but stocks since the spring of 2009, you have done very well.  Of course, this is assuming that you could time the market and buy at the very low point when everything looked really bad.  This is also assuming that anyone who bought at that time is smart enough to know when to get out.

That is the problem with bubbles.  You don’t want to miss the ride up, but you also don’t want to get out too late.  You would rather get out early than too late.

Warren Buffett’s Advice

As I saw the NASDAQ hit 5,000 for the first time in almost 15 years, I saw this article about Warren Buffett giving bad advice.

Buffett doesn’t practice what he preaches (in more ways than one).  In this instance, he says that investors should buy an index fund and hold it.  He says you will beat most hedge fund managers, which may be true to a certain extent.  As Buffett points out, you pay big fees to fund managers, as opposed to small fees when buying an index fund.

The article points out that you would have been better off buying Buffett’s top 5 stock picks over the last 6 or so years than buying an index fund.

I don’t like Buffett’s advice for a couple of reasons.  First, that is not how he got rich.  He bought specific companies that were winners.  This is the main point of the article.

But what about for capital preservation or those who simply don’t have the skills to pick winning companies?  Should you buy index funds?

Personally, I think you should preserve and grow your capital using a permanent portfolio setup, as originally described by Harry Browne.  That means that only 25% would go towards stock index funds.

You aren’t going to get rich investing in the permanent portfolio, but you won’t do that investing in index funds either.  It is to protect wealth that you have already accumulated.

In terms of investing, people like to look at stocks, but they fail to invest in themselves in learning new skills or starting a side business, etc.  This is really the best way to make a lot of money in the long run.

As for Buffett’s advice in buying stock index funds, I wonder if he would give the same advice to someone in Japan.  If you had bought the stock market index in Japan at its high over 25 years ago, you would still be down about 50%.  Buffett would respond that it can’t happen in the United States.  It may be true, but we don’t really know for sure.

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