You don’t have to be an investing genius to make a lot of money with stocks. Don’t take my word for it. Just listen to what Warren Buffett, one of the greatest investors of all time, says.
Buffett wrote to Berkshire Hathaway (BRK.A 1.92% † (BRK.B 1.81% † shareholders last year about a way that any investor could amass significant gains. But the Oracle of Omaha didn’t stop there. Buffett thinks this investing strategy could even make a monkey rich.
Buffett’s underlying premise is that “ownership of stocks is very much a ‘positive-sum’ game.” His reference was to a term used in game theory that describes a situation where the total of gains and losses will always be greater than zero. In other words, all players will be winners over the long run.
It’s important to remember that Buffett views buying stocks as buying a part of a business. That’s an accurate take. In fact, he wrote in his most recent letter to Berkshire shareholders that he and his longtime right-hand man Charlie Munger “are not stock pickers; we are business pickers.”
So what is Buffett’s strategy that he thinks will make even a monkey rich? There are only three steps involved:
- Throw 50 darts at a list of all of the stocks in the S&P 500 index.
- Buy the 50 stocks the darts land on.
- Hold those stocks for the long term.
That’s it. Buffett did mention that the monkey should be “patient and level-headed.” In particular, he warned that the monkey shouldn’t be tempted to make changes along the way. The legendary investor stated, “All that’s required is the passage of time, an inner calm, ample diversification, and a minimization of transactions and fees.”
Testing Buffett’s strategy
Just out of curiosity, I decided to test Buffett’s “monkey strategy.” I’ll admit that I deviated a little from his prescribed approach, though. My wife wouldn’t be happy with me throwing 50 darts in our house. (She doesn’t trust my aim that much.)
Instead, I closed my eyes and randomly pointed to 50 different stocks that were members of the S&P 500 two decades ago. Why go back 20 years? I figured that was a sufficient period to meet Buffett’s long-term hold criterion.
The average total return (including stock appreciation and dividends) of the 50 stocks in my “monkey portfolio” during this period was 741%. An initial investment of $10,000 spread across those stocks would be worth around $84,100.
In case you’re wondering, the biggest winner was Altria (MO 2.13% †† The tobacco giant delivered a total return of 3.050%. Some investors think that Altria is still a smart stock to buy now.
Fourteen other stocks that I chose randomly were at least 10-baggers. No stock delivered a negative return during the period. However, Lumen Technologies (LUMN 4.68% † came close with a total return of only 7%. Considering inflation, I’d chalk Lumen up as a loser.
An even easier approach
Granted, my single test of Buffett’s strategy doesn’t prove that it works. I suspect that a large enough number of tests to be statistically valid would deliver a smaller total return than what I obtained.
In fact, I’m confident that would be the case. why? There’s an even easier investing approach that Buffett also really likes: Buying an S&P 500 fund. Following this strategy would have generated a total return of around 485% over the last 20 years.
Also, I didn’t include the costs associated with buying 50 different stocks. That makes investing in an S&P 500 fund even more attractive than Buffett’s monkey-and-darts approach.
However, I truly believe that Buffett is onto something. And I wish that I had a patient and level-headed monkey following his approach to help me invest years ago.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.