We know what you're thinking, "Warren Buffett? Isn't he the billionaire who likes to play the ukulele?" Well, yes, he is that. But he's also so much more.

Warren Buffett is a legendary investor who's built his fortune through his disciplined, long term investment philosophy. And lucky for us, he's left a trail of breadcrumbs that we can follow on our journey to financial success.

In this article, we’ll explore his investing philosophy and his attitude toward index funds and ETFs. You’ll also learn about his famous $1 million dollar bet that proved the power of low-cost, long term investing.

Warren Buffett’s life to date

Warren Buffett was born in 1930 in Omaha, Nebraska. His father was a stockbroker and his mother was a homemaker. Even as a child, he showed a keen interest in money and investing. He would spend hours reading financial books and annual reports.

When Mr. Buffett was 11 years old, he bought his first share. It was a share of Cities Service, an oil company. He watched as the share price rose and fell, learning valuable lessons about the share market.

Throughout his young adulthood, Mr. Buffett’s love for investing grew stronger. He went to the University of Nebraska to study business. Then he went on to study economics at Columbia University, where he learned from some of the greatest minds in finance.

After graduation, Mr. Buffett worked briefly for his father's brokerage firm before striking out on his own. Shortly after, he went to work for his mentor, Benjamin Graham. Mr. Buffett’s time with Graham taught him value investing, which would have a huge influence on his investing philosophy.

In 1956, Warren Buffett started his own investment partnership with friends and family. He soon became known for his incredible ability to pick winning shares, focusing on companies with a strong competitive advantage. Mr. Buffett was also always willing to wait for the right opportunity to come along. Before long, his success had earned him the nickname "the Oracle of Omaha".

Buffett’s investing genius really started to shine in the 1960s and 1970s. During that time, he invested in companies such as American Express and GEICO with great success. He also started buying large portions of companies and using his influence to help them succeed.

But even as Mr. Buffett's wealth grew, he remained humble and grounded. He lived in the same house in Omaha that he had bought in 1958 for $31,500. The billionaire was famously frugal, and drove an old Cadillac. He even refused to upgrade his flip phone for many years.

In recent years, Mr. Buffett has turned his attention to philanthropy. In fact, he has pledged to give away the vast majority of his wealth to charitable causes by the end of his life.

Through it all, he has remained true to his values and investing principles. He once said: "I am a better investor because I am a businessman, and a better businessman because I am an investor." And his life is a testament to the power of hard work, patience, and a lifelong passion for learning.

The investing philosophy of Warren Buffett

When it comes to long term investing, Warren Buffett is a name that's hard to ignore. His investing philosophy revolves around three concepts: he takes a long term approach, looks for underpriced value, and focuses on fundamentals.

But there's so much more to unpack than those three pillars. In this section, we're going to dive deeper into Mr. Buffett's investing philosophy and what makes it so successful.

1.Value investing. Warren Buffett is well known for is his emphasis on value investing. This concept involves finding companies that are undervalued by the market. From his view, these businesses have “intrinsic value” that could become much more valuable with time.

One such example is General Motors. In 2012, General Motors was trading at a low valuation due to concerns about its future prospects. Mr. Buffett saw an opportunity and invested in the company, which has since rebounded.

2.Judging a business by its numbers. Warren Buffett thinks it's important to do your research and understand the companies you invest in.

In his 1985 interview with Adam Smith, Mr. Buffett said: “Business figures themselves tell me something about a business. But the price of a share doesn’t tell me anything about a business.”

Mr. Buffett spends a lot of time reading financial statements and other company documents to understand how they work. The documents also help him see a company's potential for growth.

3.Strong economic moat. Mr. Buffett invests in good companies that have a unique competitive advantage over their rivals. He calls it an “economic moat” that protects a company’s long term profitability and market share.

So, what does an economic moat look like? One example of a company with this kind of advantage is Coca-Cola.

Mr. Buffett invested in Coca-Cola for three reasons: a recognisable brand, a loyal customer base, and a vast distribution network. These factors make it difficult for other companies to compete with them.

4.Good management. Mr. Buffett believes it's important to invest in companies with good managers who can run the business well.

He looks for companies that have a good management team with a clear plan for the future. He believes these traits can help a company grow, innovate, and make better decisions.

5.Long term approach. Another key aspect of Warren Buffett’s philosophy is his long term approach to investing. He doesn't worry too much about short term ups and downs in the share market.

Instead, Mr. Buffett focuses on buying quality companies that he thinks will grow over time. He believes that it's important to focus on the big picture, instead of getting caught up in day-to-day changes in the share price.

6.Don’t swing at every pitch. Warren Buffett likes to use a baseball analogy to explain his investing philosophy. One of his famous analogies is: "you don't have to swing at every pitch.”

In baseball, the batter only swings at the ones they are likely to hit out of the park. In the same way, Buffett says investors should wait for the right investment opportunities to come their way.

In other words, you don't have to invest in every single opportunity because you fear you’re missing out. Mr. Buffett recommends investing only in opportunities that you believe in and truly understand.

By following the principles above, Mr. Buffett has had great success as an investor. He continues to be a role model for many people looking to build wealth through investing.

What is Warren Buffett's attitude toward low-cost funds?

Warren Buffett is renowned for his value investing strategy. He believes in investing in companies that are undervalued but have strong fundamentals.

However, when it comes to the average investor, he believes in a more hands-off approach.

The Oracle of Omaha is a firm believer in simple and straightforward investing, rather than trying to “beat the market”.

As such, Mr. Buffett is a big advocate for low-cost, passive investing through index funds or exchange-traded funds (ETFs). These types of funds track a particular sector or index, such as the S&P 500 and ASX 200. In fact, he plans to leave the bulk of his fortune to his wife in low-cost funds for several reasons.

Firstly, Mr. Buffett believes investing in low-cost funds is an easy way to profit from the market's growth over time. You don't have to pick individual shares, which takes a lot of time and can be risky.

Recent data back up his view. A mid-2022 study by Standard & Poor’s found that, over a 10-year period, about 90% of large-cap fund managers underperformed compared to the S&P 500 index.

This suggests that even the pros struggle to pick individual shares or actively manage a portfolio to outpace the market’s growth.

Another reason Warren Buffett likes index funds is their low fees. Mr. Buffett has long been a critic of high fees charged by mutual funds and actively managed funds. He argues that these fees eat away at investors' returns over time.

In contrast, index funds and ETFs have much lower fees. By keeping costs low, investors can maximise their returns over the long term.

In addition, Mr. Buffett also emphasises the importance of diversification. Index funds and ETFs are a great way to diversify across a wide range of shares, bonds, and other assets. Another layer of benefit to diversification is, depending on your investing strategy, the potential to outspace inflation in the long term.

In a 2017 interview with CNBC, Mr. Buffett said: “the trick is not to pick the right company”. He then adds: “the trick is to essentially buy all the big companies through the S&P 500 and to do it consistently”. This strategy helps spread risk and can lead to more consistent returns over time.

Overall, Warren Buffett's message is clear: investing doesn't have to be sophisticated. One of his recent quotes - "investing is a simple game" - suggests people can do well as investors by concentrating on the basics.

While active investing can be fun and exciting, Mr. Buffett believes it's ultimately a game that's hard to win. Most investors are better off sticking to a simple, low-cost, and long term investing strategy.

How Warren Buffett won a $1 million bet

In 2007, Mr. Buffett made a 10-year bet with Protégé Partners co-founder Ted Seides. He wagered that Vanguard's low-cost S&P 500 index fund would outperform Mr. Seides' selection of five funds that represent actively managed hedge funds. Mr. Buffett made the bet on the argument that even professional hedge fund managers struggle to beat the market over the long term.

At first, both wagerers invested their bet money of $320,000 in bonds. They did so expecting the investment to be worth $500,000 each by over 10 years. However, the investment ended up appreciating faster during the 2008 financial crisis as interest rates fell.

So, in 2012, Mr. Buffet and Mr. Seides agreed to shift the bet money. They invested about $1 million into Berkshire B-shares, which appreciated to $2.22 million when the bet ended in 2017.

While the bet was scheduled to last a decade, though Mr. Seides conceded defeat early in 2015. His investment in the S&P 500 index fund had gained a cumulative return of 85.4% in the first nine years, returning 7.1% compounded annually. Meanwhile, the hedge funds that Mr. Seides chose averaged 22% throughout almost a decade (a return of around 2.2% per year on average).

Why did a basket of actively managed hedged funds lose the bet?

Mr. Buffett said the hedge funds underperformed because of the high costs that resulted from frequent short term buying and selling. High management fees, taxes, and other associated fees ate into the returns and made it difficult for active fund managers to outperform the S&P 500. When Mr. Seides conceded, he also admitted that several other factors were unfavourable to his bet during that decade. In other words, his basket of actively managed funds would have still underperformed even if the high management fees are discounted.

By contrast, an index fund has low fees because it passively captures the performance of the underlying index. This investment fund doesn’t attempt to actively hand-pick shares to beat the market. There's less risk to be made and fewer costs to overcome in a fund that only held the same shares in an index for a long time.

In the end, Warren Buffett proved the power of long term, passive investing. He also donated the entire winnings to a charity for girls and young women.

Warren Buffett inspired Pearler's investing philosophy

Mr. Buffett's $1 million bet demonstrated that a patient approach to wealth-building is often a better strategy for most investors. At Pearler, we’ve taken a page from his book as we go on a mission to make boring investing rewarding.

Our approach to investing is straightforward, accessible, and affordable for everyone. In fact, our data says simple, diversified, and cheap ETFs are the most invested assets among the Pearler community.

So, if you're keen to learn more about this investing philosophy, check out the Pearler Learn blog. We share insights to help you grow your wealth and achieve your financial goals.

Happy investing!