Funny how obvious things can be in the rear-view mirror. Jeff Bezos, founder of online retail giant Amazon, recently saw his wealth surpass that of investing legend Warren Buffett.
Separately, Buffett’s own wager on the broad stock market index against a collection of hedge funds continues to embarrass the supposed “smart money” at those funds.
There are some very clear lessons for retirement investors in these two occurrences, and one big takeaway: You have to decide early what kind of investor you are — and then stick to your guns no matter what.
Bezos has had an amazing run at Amazon. His wealth, estimated at $65.05 billion, is mostly tied up in Amazon stock. It’s clear that Bezos is laser-focused on his company and its fortunes, even as he gets into space travel and dabbles in the media business.
That’s just a fundamental truth for anyone who starts a business and makes a success of it. To the victor go the spoils. That’s how capitalism works.
What people forget, importantly, is how many other dot-com firms came up short, leaving their founders broke and their investors busted. That’s also how capitalism works.
Buffett is another animal entirely. He doesn’t do one thing like Bezos but instead owns a lot of companies. He also has a rare knack for discerning which companies will grow inevitably into market leaders and which will not.
It’s hard to do what Buffett does — dozens of investing books on him try. So the Nebraskan billionaire was happy to make a $1 million wager for charity that a 10-year investment in the S&P 500 would beat hedge funds handily.
Buffett bought a Vanguard fund that tracks the index, the Vanguard 500 Index Fund Admiral Shares. So far, the index fund is up about 65% vs. 22% for the hedge funds.
Anybody could have bought the index fund. In fact, millions of investors do through their retirement funds. The costs are low, the portfolio is diversified (among U.S. stocks anyway) and the growth is undeniable.
So who’s got it right? Bezos, Buffett the stock picker or Buffett the passive index fund investor?
They all get it right for very different reasons, and therein lies the retirement investing lesson.
If you have a giant-killing vision and the guts to follow it to the ends of the earth, go start a company. The world needs you, the economy needs you and you deserve to be a billionaire. High risk can mean very high reward. You have to be willing to fail and start over. Lose everything, quite possibly. But you can never quit.
If you are in your heart a Jeff Bezos investor, go start a company. If not, you could try to be Buffett the stock picker. But beware, there are plenty of people out there who think that they, too, can pick a stock.
Many of them work at hedge funds. It’s possible, of course, that some hedge funds are going to do well, despite their high fees. But it’s also a certainty that investors in those funds are taking on tremendously high risk. An astounding 84% of hedge fund investors redeemed funds in the first half of the year due to losses.
These are the two big problems facing ordinary retirement investors: High risk and high cost. Owning just one stock is a crazy amount of risk, unless you’re Jeff Bezos. You could have been any one of the dozens of his competitors who tried and failed miserably.
Alternatively, you could be Warren Buffett (good luck with that) or hire someone you think can achieve his results (again, good luck with that). It’s likely to cost you a pretty penny either way, and there’s a good chance you’ll lose money.
Or, you can do what Buffett himself did in his hedge fund bet. Diversify, own the whole stock market and avoid trading. Your cost is lower, your risk is lower and, while you won’t be knocking Bezos or Buffett off any billionaire lists, you will retire with more.