Larry Swedroe, considered one of the most respected market researchers, believes that Warren Buffett's investing style just doesn't work so well anymore.
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 in academic research is that Warren Buffett wasn't really a great stock picker at all,” Swedro told CNBC's “ETF Edge” this week. “What is Warren Buffett’s ‘secret sauce?’ He discovered 50 or 60 years before all the academics what these factors are that allow you to earn excess returns.”
Swedro noted that index funds can help investors trying to imitate Buffett's performance.
“(Investor) Cliff Asness and the team at AQR did some great research and showed that what I calculated was the leverage that Buffett applied through his reinsurance company. If you bought an index of stocks that had the same characteristics, you would almost match Buffett's returns,” Swedro said. Now, every investor can own through ETFs or mutual funds the same types of stocks that Buffett bought through companies applying this academic research — companies like Dimensional, AQR, Bridgeway, BlackRock, Alpha Architect, and a few others. “
Swedro is the author and co-author of nearly 20 books — including “Enriching Your Future – The Keys to Successful Investing,” which was released in February.
In an email to CNBC, he described it as “a collection of stories and comparisons…that helps investors understand how markets really work, how prices are determined, why it's difficult to consistently outperform through active management (stock picking and market timing), and how it leads us… It's human nature to make investing mistakes (and how to avoid them).”
During his interview with ETF Edge, Swedro added that investors can also benefit from trading momentum. He stresses that market timing and stock selection often do not affect long-term success.
“Momentum is certainly a factor that has worked over the long term, although it does go through some long periods where everything else will underperform,” said Swedroe, who is also head of economic and financial research at Buckingham Wealth Partners. “But momentum does work.” . “It's purely methodical. Computers can run it, you don't need to pay a lot of fees and you can access it cheaply.”
In his latest book, Swedro likens 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 underperform.
“Wall Street needs to trade a lot so they can make a lot of money with bid-ask spreads. Active managers make more money by making you believe they are likely to outperform,” Swedroe said. “It's almost mathematically impossible for that to happen because they have higher expenses including higher taxes. They just need you to play, which is why they tell you active management is a winner's game.”
“Stupid retail money”
He sees active management as becoming more efficient at attracting emotional investors – what he calls “stupid retail money.”
“(Emotional investors) do it so poorly (that) they underperform the funds they invest in because they make wrong stock picks and wrong market timing,” Swedroe said.
