{"id":90449,"date":"2025-02-15T22:12:02","date_gmt":"2025-02-15T22:12:02","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/finance\/buffetts-way-vs-index-funds\/"},"modified":"2025-02-15T22:12:02","modified_gmt":"2025-02-15T22:12:02","slug":"buffetts-way-vs-index-funds","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=90449","title":{"rendered":"Buffett’s Way vs. Index Funds"},"content":{"rendered":"


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Before the article, here\u2019s what\u2019s happening this week on our podcast, <\/em>Personal Finance for Long-Term Investors<\/em><\/strong>:<\/em><\/p>\n

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Reader Phil wrote in last weeK<\/p>\n

Jesse \u2013 I appreciate everything you have to say on stock investing and low-cost, diversified index funds. I also love all the Warren Buffett wisdom you share.\u00a0But, at least when it comes to investing, isn\u2019t Buffett a <\/em>counter-example<\/em><\/strong> to diversified indexing?\u00a0How do you square that circle? <\/em><\/p>\n

Phil<\/em><\/cite><\/p><\/blockquote>\n

This question is like a young dad placing a baseball nicely on a tee so that little Timmy (that\u2019s me) can step up with his $29 Wal-Mart aluminum bat and slug a double to the left-center field fence. Bam! Thanks for the setup, Phil!\u00a0<\/em><\/p>\n

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Phil has a great point. The type of long-term investing I describe on The Best Interest<\/em> is not <\/strong>how Buffett has invested over his long career. But if you follow me today, you\u2019ll see where the common ground and divergences exist. I\u2019ll present a \u201cunified theory\u201d of stock investing that connects diversified indexing and<\/em> individual stock picking to the same logic.\u00a0<\/p>\n

The Core Commonality<\/strong><\/h2>\n

Whether picking individual stocks or buying an index fund, investors ultimately buy ownership in real businesses. Stocks are not lotto tickets. They are shares of companies, a fractional ownership of those companies\u2019 earnings, cash flows, and assets.\u00a0<\/p>\n

Both Buffett-style investing and indexing rely on the idea that a company is worth the present value of its future cash flows. If we added up all a company\u2019s profits \u201cfrom now until Judgement Day,\u201d as Buffett would say, \u201cand discounted those dollars to today,\u201d that\u2019s the business\u2019s intrinsic value.\u00a0<\/p>\n

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But does a stock\u2019s price<\/strong> always match the company\u2019s value,<\/strong> as described above? That\u2019s where some of today\u2019s contention and confusion exist. I\u2019d answer that question this way:\u00a0<\/p>\n