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The stock market is soaring with nearly every sector reaching all-time highs. The S&P 500, for instance, is just 3% below its record peak from December 6th and an astonishing 65% higher than the most recent 15% correction that occurred in the fall of 2022. Valuation metrics such as the Buffett indicator signaled that the market has entered uncharted territory, appearing more overextended than ever.
With this important ratio exceeding 208% it's difficult to find words or comparisons that fully capture just how expensive the market is when measured against historical norms. So, why would anyone buy an index fund like the S&P 500 when it's clear that the market is overvaluing the majority of stocks?
In this video, we examine exactly that, answering this often confusing question by showcasing statements by two of the greatest investment minds of all time, Warren Buffett and Charlie Munger. But, before we listen to their opinions, which may not be as straightforward as you think, we first need a bit of background.
When most people think about long-term investing, most of the time they're talking about an investment philosophy known as dollar cost averaging. This philosophy is pretty simple. Buy a wide basket of stocks such as the S&P 500, consistently buying at set time intervals across a long period. This strategy is well documented and time tested.
Even legendary investors like Buffett and Munger, who run their own publicly traded company, often advocate for this exact approach. While they stand to benefit from investors buying Berkshire Hathaway stock directly, their endorsement of broad dollar cost averaging highlights the strategy's reliability for almost everyone.
I I recommend the S&P 500 index fund and have for uh a long, long time to people and uh I've never recommended Berkshire to anybody uh cuz I I don't want people to buy it because they think I'm tipping them into some side. Never. I mean, no matter what I was selling before. And uh uh and you know, I I I've made it public.
I you know, I'm on my death, there's a there's a fund for my uh the then widow. And uh 90% will go into an S&P 500 index fund and 10% in Treasury bills. And uh on the other hand, I'm very happy having my future contributions to global charities that'll be spread over 12 years or so after my death. Uh While it may be boring, this strategy is incredibly underrated when looking over the stats.
Almost everyone in professional finance has an extremely hard time beating the S&P 500 in the long term. And I truly mean everyone. From hedge funds to mutual funds to day traders and everyone in between, the simple truth is that over a period lasting longer than a decade, it becomes nearly impossible to beat a simple index focusing on the largest companies in the US.
Warren Buffett was so sure of this fact that in 2007, he made a public service announcement stating he was willing to bet anyone $1 million that a simple low-cost S&P 500 fund would beat out a hedge fund over a period lasting 10 years. And in 2008, Ted Seides of Protégé Partners stepped forward. Ted argued that his basket of hedge funds would win out, but in the end, after 10 years in 2018, Warren won his bet and it wasn't even close.
The hedge funds chosen by Ted returned just 2.2% annually, while the index fund returned 7.1%. Outperforming the hedge fund strategy by nearly 58%. But this fact still doesn't answer a simple logical question. Why would you place thousands of dollars into an index fund that is two to three times overvalued when compared to historical norms?
Is passive investing still worth it now considering this immense growing risk? Why not just wait for a fair price? And that legitimate question is commonly brushed aside by the so-called financial experts. So, instead of me answering this, I'm going to let the greatest investment mind of all time answer it, Warren Buffett.
A man who despite owning his own publicly traded company has advocated for common people to continue buying broad indexes at regular intervals even when asked if they should buy his stock directly. Take a listen. Warren, let's talk about some of the things that really resonated with people and and maybe start where you began the annual meeting this year and that was talking to your investors and telling them a little bit about investing, some tips and lessons along the way.
You kind of used it as a teaching experience at the top. Yeah, that normally I don't do that. I mean, in fact, I can't remember when I did it. The we just go right into questions and answers, but I really thought that that maybe you were getting a little bit the wrong lesson because all the questions would naturally tend toward current events.
And so, this time I went back uh actually to 1942 when I bought my first stock as an illustration of all the things that have happened since 1942. We've had we've had uh 14 presidents, seven Republicans, seven Democrats. We've had we've had world wars, we had 9/11, we had the Cuban Missile Crisis. We have had all kinds of things.
The best single thing you could have done on March 11th, 1942 when I bought my first stock, which is buy an index fund and and and never look at a headline, never think about stocks anymore. Just like you would do if you bought a farm. You just buy the farm and let the let the tenant farmer run it for you.
And I pointed out that if you'd put $10,000 in an index fund that reinvested dividends. And I paused for a moment to let the audience try and guess how much it amounted to. And it would come to $51 million now. And the only thing you had to really believe in then is that America would win the war and that America would progress as it has ever since 1776.
And that American business, if America moved forward, American business would move forward. You didn't have to worry about what stock to buy. You didn't have to worry what day to get in and out. You didn't You didn't know the Federal Reserve would exist. Whatever it might be. And uh uh America works.
Now, you might be thinking that's a crazy return. $51 million from just 10 grand. But with a bit of investigation, it becomes clear that Warren may have simply just gotten lucky with his choice of starting date. The central argument of this video is that buying into the market at its current levels doesn't make much sense given how overvalued it appears to be.
Warren used March 11th, 1942 as the starting point for his example, but let's take a closer look at what was happening in the market at that time. A quick glance at the Dow Jones chart from that period reveals why some might find this benchmark unfair. Just 4 years earlier, the market had hit a local peak before losing nearly half its value by 1942.
World War II was in full swing and the Dow was at a significant low. So, it's no surprise that the returns look extraordinary. Buffett essentially picked the bottom of the market as his starting point. In fact, the video we watched was from 2018. If we apply the same dates today, that $10,000 investment would now be worth an absurd 87 million.
So, really, his example is a questionable way to look at passive investing success. Maybe someone wouldn't be so lucky to invest at this critical moment in American economic history. But before you click away and call Warren a fraud, let's take one quick step back. Let's go back to August 1929, right before the biggest stock market crash in American history, the Great Depression.
Let's say you invested 10k right here. Would you still see success? Well, as it turns out, yes. 10k invested in August of 1929 would give you $46 million today. A lot less than 87 million, but still wildly successful regardless. Now, it would be a psychological nightmare as it would have taken you around 16 years to see any sort of positive return.
But regardless, given a long enough time frame, it would still be a success. And if that's not convincing enough, consider the impact of dollar cost averaging. This strategy becomes virtually unbeatable. Remember, in Buffett's example, we're simply assuming the money was left untouched in the index, specifically 10 grand with dividends reinvested.
But if we consistently added a set amount of money every month, dollar cost averaging, the returns become even more staggering. To illustrate just how powerful this approach can be, let's take a look at another striking example that drives this point home. Let's say you were unlucky again and decided to invest in the QQQ, which is essentially a low-cost ETF that tracks the Nasdaq 100.
Keep in mind the Nasdaq is heavily tech weighted. Now imagine you invested 10 grand on March 27th, 2000, right before the dot-com bubble burst. Sounds grim, right? In the years following that date, the Nasdaq 100 plummeted by approximately 78%. But here's the key. You kept buying, adding $100 to your position every month.
Despite investing at arguably the worst possible time according to my data, by 2025, your portfolio would have grown to $322,000. That's an astonishing 15% annual return even with such a rocky start. This very simple example just shows you that it really doesn't matter when you invest, even if you're investing at the top, as long as you're in a low-cost index fund focused on American companies and you continue to buy at regular intervals.
History shows that you are likely to come out on top. Passive dollar cost averaging is undefeated in American history. Unless we end up like Iceland, Japan, or Greece, this strategy will likely remain unbreakable. And investing in these broad low-cost indexes at what seems to be an overvalued top hasn't been a big problem, at least historically, especially when you add in dollar cost averaging.
Thank you guys for watching. As always, please make sure you hit that like and subscribe button and let me know in the comments what you think about the examples and Buffett's words.
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