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Stockpicking legend Warren Buffett and index champion John Bogle both knew the other was right about investing

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America’s investment approaches look as polarized as its politics. Fierce defenders of indexing declare that it trounces stock picking, while active managers proclaim the virtues of their selective research and analysis. 

Yet these two camps have more in common than meets the eye. Take two titans of our time: John Bogle, godfather of indexing and the founder of mutual fund giant Vanguard Group, and Warren Buffett, CEO of Berkshire Hathaway
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 and the gold standard of stock picking. Each man’s accomplishments are a strong case for one side, but more important is what they share.

Start with mutual respect. In his 2017 letter to Berkshire shareholders, Buffett wrote: “If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle.” In a 2018 chapter of a book I edited, “The Warren Buffett Shareholder,” Bogle lauded Buffett as a man of “integrity, wisdom, and class.”

Buffett practiced and preached to several generations the appeal and perils of stock picking. But he has long advised ordinary investors to index, intends for his wife’s bequest to be invested in an index, and won a high-profile bet favoring the index over a stock-picking hedge fund (after fees).

Bogle wrote his college thesis defending indexing, founded one of the most successful index funds, and spent his adult life as the method’s champion. But he endorsed Buffett’s value investing approach and, a few months before he died in January 2019, wrote a Wall Street Journal article warning of the perils of indexing when index funds wield enormous concentrations of power. 

Both knew that the other was right, as both forms of investing, and many variations, are intellectually defensible and potentially profitable. Indeed, Bogle and Buffett recognized that all investors contribute something valuable — starting with capital — and each cohort adds something distinctive: indexers offer the market return to millions for cheap while stock-picking channels capital efficiently. Short-term traders add liquidity and shareholder activists promote corporate accountability.

John Bogle


Associated Press

As a thought experiment, however, which approach could America not live without? Which adds the greatest benefit? Suppose all investors adopted an identical strategy. If everyone indexed, markets would freeze; if everyone day-traded, markets would be frenzied; and if everyone were an activist, all of corporate America would be frazzled.

Given that all investor types are needed and important, how can they learn from and benefit from one another? Champions of indexing admit that other investors add value engaging in stock picking, consulting about business particulars and providing constructive criticism.

Likewise, the most fervent proponents of activists appreciate that they cannot alone supply required accountability. After all, they cannot police every company and cannot guarantee that they are always correct in their choice of targets. 

Those who question whether short-termism is a significant problem emphasize the presence of substantial long-term owners. Indexers are only nominally long-term — they sell when prices fall — and activists often do come off as short-term opportunists.

An important but often overlooked lesson follows from the special value that shareholders of Buffett’s stripe add: indexers could put far more resources into studying individual companies, and transient investors should prioritize at least a few long-term positions.

After all, indexers wield enormous power. With even a modest increase in resources allocated to the attention of particular business topics, they’d be a huge positive force in corporate America. Rather than governance guidelines and remote control, they would attend annual meetings, read annual letters, participate in engagement, understand capital allocation and help identify highly qualified directors.

Many activists already embrace these principles. More should follow. The cohort would greatly improve its reputation — and therefore its influence.

Worth emphasizing is that few shareholders are purely members of one of these cohorts at all times.  Even most of the largest indexers are families of funds that include some focused stock pickers. There are hyperactive trading desks and rapid-fire arbitrageurs at many firms famous for being long-term concentrated investors. 

Indexers and traders would certainly benefit from studying the quality shareholder playbook. Just as Buffett learned from Bogle and Bogle learned from Buffett, intelligent shareholders of every type can teach each other a thing or two to make them better investors.  

Lawrence A. Cunningham is a professor and director of the Quality Shareholders Initiative at George Washington University.  His books include Quality ShareholdersDear Shareholder; and The Essays of Warren Buffett.  Cunningham owns stock in Berkshire Hathaway and is a shareholder, director and vice-chairman of the board of Constellation Software. 

More:Life inside a stock market bubble is great until someone takes out a pin

Also read: Active managers see value in these 3 company practices but indexers hate them. Who’s right?



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‘I could live on my Social Security and still save money’: This 66-year-old left Chicago for ‘calming’ Costa Rica — where he now plans to live indefinitely

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Editor’s note: This article was first published in September 2019.

A school break changed 66-year-old Martin Farber’s life forever.

In 2007, his daughter — who at the time was attending Illinois State University — decided she wanted to spend a college holiday volunteering in Costa Rica and staying with a local family, he explains. She came home raving about the experience, so, in 2008, Farber — who at the time was living in Evanston, Ill., just outside Chicago, and selling cars — took his first trip there.

“It was a big surprise to me — bumpy roads, dogs barking in the streets,” he says. “I wasn’t enamored at first.”

But as his daughter began traveling there more and eventually moved there for a year, he took additional trips to Costa Rica. It quickly grew on him — in particular, the people. “The Costa Rican people are warm, open and friendly. I felt less invisible in a strange country in a strange town where I didn’t speak the language than I did in Evanston.”

And the more time he spent there, the more it impacted him: “On one of my trips there, I thought: My daughter’s life makes more sense than mine,” he says. “There was nothing wrong with my life, but I felt that my life was out of context with who I’d become. … I would have bills and make money to pay them, but that had ceased to be satisfying,” he recalls. “I knew I needed to change my life — there was no more joy in what I was doing.”

What’s more, when he’d return from his Costa Rica trips, people noticed. “I would come back, and my friends and therapist would say: You seem better after you go,” he says with a laugh.

A view from the hot springs near Martin Farber’s home in Costa Rica.


Martin Farber

So in 2014, he packed up and moved to Orosi — a picturesque, lush small town with waterfalls and hot springs a little over an hour’s drive from San Jose — promising himself he’d stay for two years. It’s been five, and he now plans to stay in Costa Rica indefinitely. (Though Farber notes that, to him, “it’s not a retirement; it’s a chance to lead a new and different life.”)

Here’s what his life is like, from costs to health care to residency to everyday life:

The cost: While many expats spend way more living in Costa Rica, Farber says: “I could live on my Social Security and still save money.” He says “a person can live on $1,200 per month, two people on $2,000.” The key, he says, is to live more like he does and as the Costa Ricans do — in a modest home, eating local food and purchasing local goods.

Indeed, Farber himself spends just $300 a month for rent (he rents a home from a friend who moved recently and gave him a good deal), roughly $225 a month on groceries and just $50 a month total on water and electricity (the temperate climate in Orosi means you rarely need heat or air conditioning). The veteran Volkswagen
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salesman saves money by not owning a car (those over 65 ride municipal buses for free), which can be a significant expense in Costa Rica; for his cellphone, “I pay as I go … roughly $10 may last me a couple weeks or more,” he says, adding that “many people handle there their cellphones this way. You can get them recharged anywhere.”

His major expense is travel: He goes back to the U.S. to visit his mother in Florida several times a year and lately has spent part of the summer in Chicago helping out a friend with a dealership there. He also spends a good amount of money on health care. He says that while flights can be had for as little as $350 roundtrip during offseasons, the cost can be much higher the rest of the year.

In the saddle.


Martin Farber

Health care: Farber, who has permanent resident status in Costa Rica, says he pays about $90 per month to participate in the country’s health-care system — adding that the health care he’s received has been very good. (A 2018 study of health-care quality and access in more than 190 nations ranked Costa Rica No. 62.)

When he developed a detached retina, though, he paid for the procedure out of pocket so that he didn’t have to wait for the required surgery, he says — adding that the entire procedure cost him about $5,000. “I would have had to have waited four days,” he says, if he had not paid to expedite matters. “That might have been fine, but it might not.” And he adds that the quality of care depends on where you get it in the country.

Lifestyle: Though Farber says that he “moved here with no goals and no agenda,” he’s found plenty to do. “I take Spanish lessons two days a week for two hours a day. It’s been great. I never thought I would acquire a usable language in my 60s,” he says. He also rides his bike all around the area, does some writing and belongs to a community group that undertakes projects to improve the area.

And he often simply takes in nature, which he says has been an essential part of why he feels calmer and more relaxed in Costa Rica than in the U.S. “I live at 3,000 feet but in a valley surrounded by coffee fields and lime trees and water. At night, if I open the windows, I can hear the river rushing by,” he says. “It is very calming … hundreds of trees everywhere … you know the Earth is alive.”

The historic Iglesia de San José de Orosi.


iStock

Cons: “I don’t want to overglorify. It’s not without its problems,” Farber says of Costa Rica. “There are social problems and downsides.” He notes that crime and petty theft can be a problem (“I am cautious,” he says of his approach) and seem to have increased since he moved there, and adds that he misses out on some cultural things because of where he lives. And, he says with a laugh, “I can’t order Thai food at 9 at night.” But, he adds: “These are trade-offs — in the afternoon, I get to walk in the coffee fields and see flocks of parrots.”

Residency: To qualify for Costa Rica’s pensionado visa, expats must prove that they have a pension of at least $1,000 coming in each month. (Here are the details of that program.) Once you have lived in Costa Rica for three years, you can apply for permanent residency. Farber used a lawyer to help him figure out the ins and outs of residency options; his entire path to permanent residency took about a year, he says.

The bottom line: “After five years I am still amazed and surprised that I made the decision to lead a life I never thought I would,” he says. And while he may not stay in Orosi forever — “the town doesn’t have an ambulance, [and] I don’t know what it will be like to be 80 there,” he says — he does plan to stay in Costa Rica in no small part because of the people and sense of community. “I have the feeling that life is good here,” he says. “It’s hard sometimes, but we are all in it together.”



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Mutual Funds Weekly: These money and investing tips can help you read the market’s signs and stay on your path

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