Image for Warren Buffett’s Biggest Mistake ...

*Pic: Warren Buffett, not to be confused with Jimmy Buffett ...

Second in a new series ... financial advice from The Naked Investor. All columns are collected under Writers HERE . Buffett the Vampire Slayer If you’ve never heard the name Warren Buffett, then here’s the quick intro: He’s an 86-year-old American guy worth more than $100 billion.

If you’ve never heard the name Warren Buffett, then here’s the quick intro: He’s an 86-year-old American guy worth more than $100 billion.

If you believe his fanboys (and they are many) he’s the greatest investor of all time. Business genius. Slayer of vampires and protector of virginity.

Look, you can’t argue that Wazza’s pretty good at the stock-picking game. Probably the best ever. Like a lot of billionaires, he’s also a complete tightarse.

He’s done some good things in his time. Making shareholders in his company, Berkshire Hathaway, supremely rich is one. He’s also given more than $30 billion to charity, and promised to donate 99% of his wealth when he snuffs it.

Then there’s the not-so-good stuff.

Sensitive New-Age Billionaire

Like telling his son that if he got fat, he’d be cut out of the Buffett billions. The original weigh-before-pay plan.

Then there’s the fact despite his squillions, he kept his first wife on such a tight financial leash she had to shop at K Mart.

I’m happy to accept that Buffett’s a product of his generation - he made his first million in the days when most families didn’t own a washing machine. Back then, the little woman was expected to stay at home and scrub the floor, not go shopping.

Except now it’s 2017 not 1957, and it’s no longer considered quaint to tell the woman in your life how she should spend her money.

So rather than let his current wife decide what she should do with the billion or so she’ll inherit, he’s left these instructions in his will:

“Put 10% of the cash in short-term government bonds and the other 90% in a very low cost S&P 500 index fund”.

And that’s Buffett’s biggest blunder right there. In saying that, he’s told millions of would-be investors that they’ll never be any good. They’ll never beat the market. They should accept being average.

Slightly below average, truth be told. Even low-fee index funds have costs, so you’ll end up with a return just below average. In other words, index funds are the Nissan Pulsar of the investing world.

Why I Don’t Invest in Luncheon Meat

If you don’t know what an index fund is, it’s just a ‘basket of shares’. For example, the ASX200 is a measure of how much the biggest 200 companies on the ASX are worth. That’s not the full story, but it will do for now.

To put it another way, it’s like going to the supermarket and buying one of everything on the shelf. You’ll get a bit of the nice stuff – aged rib eye steak, smoked salmon and some double cream brie.

Then you’ll pick up plenty of the middle of the road stuff. Like rice, milk and coffee.

Mostly, you’re buying horrid shit.  Home brand sausages. Sad, wilting vegetables. Tins with ‘luncheon meat’ on the label. And you buy more of that than anything else.

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Think about that for moment, because that’s exactly what you’re doing when you invest in an index fund. Sure you get some happy times (like when CSL goes through the roof), but you’re also stuck with a trolley full of garbage like AMP, Ten Network and ABC Learning.

I don’t like luncheon meat and I hate crap stocks. I’d never buy either, so it’s fair to say I’ll never put money in an index fund.

Big, Boring Banks

“But fund managers don’t beat the index” I can hear some of you cry.

There’s some truth in that - more so in the US than back home. But that’s got more to do with the fees managers charge than the performance of their funds.

Australia’s also a backwater, in terms of sharemarkets that is. The ASX200’s value mostly comes from five banks, a couple of miners and two supermarket chains. If that’s what your fund manager buys, then they’re going to get the same performance as the index.

If you’re happy being average, then I wish you all the best. Over time, you’ll get decent returns from your investment.

The Naked Investor isn’t about being average. Okay, not everybody can afford a Porsche, but it’s better to aspire to a 911 and end up with a BMW than dream of buying the same car your Uber driver has.

So over the next few weeks, I’ll be showing you how to go shopping for shares and avoid the plain-label rissoles.

The Naked Takeaway

When Buffett dies (it can’t be too far away - the man lives on a diet of Coke and hamburgers), he’s leaving behind a very rich widow. And that’s why he’s happy for her to invest in index funds. Because she’s already rich.

If you’re not rich, then don’t copy Buffett’s advice to his executors. Instead, look at what Buffett did when he was alive - buy great companies, and hold them for a long period of time.

Next week we’ll be unwrapping our Five Step Plan for making money in the market. There’s nothing magical about it, just common sense strategies. Step One’s already helped Buffett make $100 billion.

*You can follow *The Naked Investor at http://www.nakedinvestor.com.au , on Facebook and on Twitter @FinanceNaked. The Naked Investor provides education, not advice. Do your own research, you know the drill.