-The Socratic Forum-

A Socratic Investor Presentation

Who is Warren Buffett (Trades, Portfolio)?

Often referred to as "The Oracle of Omaha," Warren Buffett is the legendary investor as well as the Chairman of Berkshire Hathaway. His financial success resides in determining when and how much to be invested in stocks, bonds and cash. For more information on take a look at GuruFocus’ profile on Warren.

What has been a common theme in the media’s message since the Berkshire Hathaway Annual Shareholder meeting May 2014?

• Buffett recommends what to invest in for the non-professional investor, a low cost S&P 500 index fund.
• Read MarketWatch.com March 2014 article Warren Buffett to heirs: Put my estate in index funds for more detail.
• And BusinessInsider.com's Mar 3 2014 article Warren Buffett Has Some Increadibly Specific Advice For Where The Average Investor Should Invest

What is this message in reference to?

At the Annual Shareholder meeting, and in his annual letter to shareholders, Buffett stated an opinion that low-fee managers would outperform high-fee managers over the long run. The message is validated by Buffett’s "money where my mouth is” comment. For after his passing, the advice to his trustee is to put 90% of the funds in a “very low-cost S&P index fund.”

The comment can be found in a link to his public website

What is the message not including?

• Is there more to Buffett’s recommendation than “what” to buy?
• Does he ever hint to "when" one should consider buying a low-cost index fund?
• The details can be found on the public access link to his shareholder letter.

What has Warren stated previously about “when” the stock market may be attractive?

As stated in the GuruFocus' "Where are We With Market Valuations?" article, "as pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”

What were his comments in a December 2001 Fortune article about the market in 2000?

Memorably he stated that "the ratio rose to an unprecedented level. That should have been a very strong warning signal."

What was the percent return of the S&P 500 after the Market Cap/GDP reached that "unprecedented level?"

Has there ever been another time when Buffett touted a “very low-cost index?”

As stated on Reuters.com in the Buffett: Index funds better for most investors article by Jonathan Stempel dated May 6, 2007, “Buffett said at a press conference,” “A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money.”

What was the Market Cap to GDP at that time?

What was the percent return of a “low cost” ETF that tracks the S&P 500 from May 6, 2007 to March 2009?

Some Questions:

• Was the media’s message in 2007 forgetting to include the “when” part of Buffett's advice?
• What have the returns been the last two times the Market Cap to GDP were at these levels?
• What is the Market cap to GDP today?

• Considering the "best indicator where valuations stand," is currently near previous highs, might Warren actually be estimating that by the time his trustee is needed, the Market Cap to GDP will be at much lower levels?
• If the valuation ratio reverts to those historical lows of 40%, and we are currently at 122%, does that mean a near 67% drop is possible?
• If the valuation indicator reaches those levels wouldn't you also recommend an allocation of 90% to stocks?
• Might the media, once again, be forgetting to include the “when” part of Buffett's advice today?
• What was a great lesson in communication and rhetoric from a favorite college professor?
  1. Read the original document; Professor Carolyn Calloway-Thomas Ph.D.
• Have you read the original shareholder letter?
  1. http://www.berkshirehathaway.com/letters/2013ltr.pdf

Note: This article is to invoke dialogue, not provide investment advice.

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• Who is the Socratic Investor?
  1. Value Investing, Global-Macro Hedge Fund Strategist, Philosopher, Psychologist, Teacher, ADD, OCD, Dishwashing Socratic Gadfly
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