The Vanguard ETF Warren Buffett Endorses That Young Investors Should Buy and Hold Forever

You likely know him best as a brilliant stock picker, and the key reason Berkshire Hathaway (BRKA +0.31%) (BRKB +0.35%) shares typically outperformed the S&P 500 during the 55 years he served as CEO of the conglomerate.

The fact of the matter is that Warren Buffett wishes you wouldn’t follow in his exact footsteps. He’d much rather most people do things a little differently than he did, largely because most investors can’t do exactly what Buffett did and how he did it while heading up Berkshire.

So what does he want you to do? Buy and hold the simplest of all investment options. That’s the Vanguard S&P 500 ETF (VOO +0.04%), which is merely meant to mirror the performance of the aforementioned S&P 500.

Buffett makes no bones about it

He’s never been shy about saying it. As Buffett plainly put in writing in his 2013 letter to Berkshire shareholders, “My advice to [my estate’s] trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)”

Of course, that’s for what will eventually be his estate’s money. That doesn’t necessarily mean it’s the best decision for you.

It’s what Buffett says immediately after that, however, that hits home for everyone: “I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”

The thing is, history says he’s right.

This begs the question… why didn’t Buffett follow his own advice for Berkshire Hathaway? Mostly because it didn’t make sense to.

Not your typical equity portfolio

Although it’s often treated as one or the other, Berkshire is neither a conventional company nor a mutual fund, even though it owns a portfolio of stocks. Buffett’s made it abundantly clear that Berkshire Hathaway is first and foremost an insurer that requires reliable cash flow, some of which comes from dividends, but much of which is generated by the dozens of cash-generating businesses that Berkshire outright owns.

These include Shaw flooring, Fruit of the Loom, Dairy Queen, railroad BNSF, and Duracell, just to name a few. These companies collectively generated $44.5 billion worth of operating earnings for the $1.1 trillion behemoth last fiscal year, making it much easier for the conglomerate to remain patient with some of its stock holdings. It’s not a luxury that average investors with typical portfolios have.

So who knows? If Berkshire Hathaway’s idle cash and Buffett’s personal wealth were not intertwined with a large collection of other cash-generating businesses, he may well have used it to buy and hold the Vanguard S&P 500 ETF, or its equivalent SPDR S&P 500 ETF Trust (SPY +0.03%).

One thing’s for sure either way. Buffett certainly isn’t the only stock-picking genius who suggests that trying to beat the market — by buying and selling individual stocks — is a mistake for most people. Plenty of experts recognize that a more active approach to investing often draws you into or out of a position at the wrong time. Buffett’s just trying to steer his estate around those traps that are so easy for investors to fall into without realizing it.