Invest like Buffett, go for ETFs

Exchange-traded funds a low-risk way to emulate buy-and-hold strategy

Published on Mar 10, 2013

By Goh Eng Yeow Senior Correspondent

Even with his financial prowess, legendary investor Warren Buffett failed to outperform the widely watched S&P 500 Index last year.

It marked the fourth straight year the index has got the better of him, even though his company, Berkshire Hathaway, still made a mouth-watering US$24.1 billion (S$30billion) profit - the equivalent of United Overseas Bank's market cap.

That gain translates to a 14.4per cent increase in Berkshire's per-share book value, but it was still less than the S&P 500's 16per cent advance.

As he noted in a candid admission in his annual newsletter to shareholders: "When the partnership I ran took control of Berkshire in 1965, I could never have dreamt that a year in which we had a gain of US$24.1 billion would be sub-par. But sub-par it was."

For the rest of us, it raises one question: If even Mr Buffett has a problem in beating the benchmark with his legendary stock-picking skills, what chance do the rest of us have with our far more modest skills?

When I think of the many scandals involving listed firms here like FerroChina and China Sun Bio-chem that I have encountered as a financial reporter, I cannot help agreeing with another observation made by former Morgan Stanley investment banker Michael Dee, who said there is simply too much risk for retail investors to buy single stocks.

Sink a big chunk of your savings in one of these dud companies and you run the risk of seeing your hard-earned money go up in smoke.

What people like Mr Dee suggest instead is for retail investors to stick to exchange-traded funds (ETFs).

These are baskets of stocks created by giant fund managers, such as State Street and BlackRock, which aim to replicate the performance of widely watched market indexes, such as the S&P 500, Hang Seng Index and Straits Times Index.

The beauty of such products is their low management costs, which can go as low as 0.09 per cent in the case of SPY - the ETF tracking the S&P 500.

There is also no risk of the investor losing his shirt as his investment is spread out over the large number of stocks that make up the ETF, thereby mitigating the potential fallout that the failure of one counter would have.

Better still, buying into an ETF may be the simplest means a retail investor can adopt in order to emulate the successful buy-and-hold strategy deployed by Mr Buffett at Berkshire Hathaway.

Berkshire owns a number of insurance companies that generate plenty of cash as the nature of the business is to collect payment of premiums upfront in order to settle any claims that may occur later.

Mr Buffett used the premiums to buy up large chunks of US household names such as American Express, Coca-Cola, IBM, Wells Fargo and most recently Heinz.

For the rest of us, the corollary to Berkshire's insurance premium income stream would have been the money we save every month which gets almost zero returns in the bank.

If we want to follow in his footsteps and use our savings to buy into local blue chips, such as DBS and Singapore Airlines, the only way to do it is to buy an ETF traded on the Singapore Exchange, such as the

SPDR Straits Times Index ETF or the Nikko Asset Management STI ETF.

The more adventurous investor who wants to venture beyond Singapore's shores will be spoilt for choice, with more than US$2 trillion worth of ETFs all over the world.

Take my case. In the past two years, I have visited China several times and was very impressed with the economic miracle occurring in various parts of the country.

When visiting relatives in my ancestral village near Quanzhou city in Fujian province last August, I was amazed by the great strides they had made in their standard of living over the past two decades.

It convinces me that the vast economic transformation taking place in China is not a passing fad.

But rather than try to pick the winners that may emerge from the Chinese economic miracle, I start to nibble at the Hang Seng H-share ETF, which is made up of the biggest mainland companies listed in Hong Kong.

So far so good. My adaptation of Mr Buffett's investment strategy appears to be working. The H-share index has risen 23 per cent in the past six months, as China's economy gathers steam, boosting the value of my investment.

engyeow@sph.com.sg