Larry Swedroe, considered one of the most respected market researchers, believes Warren Buffett’s investing style is no longer working.
He cites 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 through academic research is that Warren Buffett wasn’t really a great stock picker at all,” Swedroe said on CNBC’s “ETF Edge” this week. “What was Warren Buffett’s “secret sauce”, he figured out 50-60 years before all scientists what exactly factors allow you to get extreme returns.”
Swedro noted that index funds can help investors trying to imitate Buffett’s performance.
“[Investor] Cliff Asness and the AQR team did some excellent research and showed that this explains the leverage that Buffett used through his reinsurance company. If you bought an index of stocks that had the same characteristics, you would essentially match Buffett’s returns,” Swedro said. “Today, every investor can own through ETFs or mutual funds the same types of stocks that Buffett bought through companies that applied this research – companies like Dimensional, AQR, Bridgeway, BlackRock, Alpha Architect and several others.”
Swedro is the author or co-author of nearly 20 books, including “Enrich Your Future—Keys to Successful Investing,” 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 difficult to consistently outperform through active management.” [stock picking and market timing,] and how human nature causes us to make investment mistakes [and how to avoid them]”
In his interview with ETF Edge, Swedro added that investors can also benefit from trading momentum. He argues that market timing and stock selection often have no impact on long-term success.
“Momentum is definitely a factor that works in the long term, although it does go through some long periods as everything else will lag. But momentum does work,” said Swedro, who is also head of economic and financial research at Buckingham Wealth Partners. . “This is a purely systematic approach. Computers can run it, you don’t have to pay big fees, and you can access it with cheap momentum.”
In his latest book, Swedro compares the stock market to sports betting and active managers to bookmakers. He suggests that the more investors “play”—or invest—the more likely they are to do worse.
“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 believe they are likely to beat the market,” Swedrow said. “Mathematically, it’s almost impossible because they simply have higher costs, including higher taxes. They just want you to play and so, you know, that’s why they tell you that active management is a winner’s game.”
“Dumb Retail Money”
He believes active management is becoming more effective at attracting emotional investors, whom he calls “dumb retail money.”
“[Emotional investors] do it badly [that] they underperform the funds they invest in because they pick stocks incorrectly and they time the market incorrectly,” Swedro said.