Meet the Warren Buffett ETF That Turned $10,000 Into Over $253,000

Warren Buffett's annual letters to shareholders are an incredible source of investing knowledge. In those letters, he shares the investment philosophy that's led him to grow Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) value around 20% per year for over 60 years since taking over the company.

Buffett isn't just writing for his shareholders. He's writing for everyone, from the hedge fund manager with billions of dollars in the market to the "know-nothing" investor who's just getting started. And he acknowledges that different investors need different advice.

In his 1993 letter to shareholders published on March 1, 1994, he outlined the situations in which it's important to diversify your investments. His recommendation for many investors is to buy a simple fund that can easily provide that diversification for you.

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If you listened to Buffett and took action the day he published that letter, you'd have turned $10,000 into more than $253,000 by investing in one exchange-traded fund (ETF). You'd have more than double that amount if you followed his recommendation to invest periodically and added just $100 per month to the fund.

The good news is that investors can still expect similar returns in the future by investing in the same ETF, or a similar ETF that Buffett recommended more recently.

The ETF Buffett says can outperform most investment professionals

One of the investment cases requiring wide diversification outlined in Buffett's 1993 letter to shareholders is "when an investor who does not understand the economics of specific businesses nevertheless believes it in his interest to be a long-term owner of American industry." In other words, this is when someone knows they should be investing, but doesn't have the time or inclination to study the individual companies and stocks in the investment universe.

In that case, Buffett recommends owning a wide variety of equities, and his preferred method for doing so is by buying an index fund like the SPDR S&P 500 ETF (NYSEMKT: SPY). He's also a big fan of the Vanguard S&P 500 (NASDAQMUTFUND: VFINX) index mutual fund, and the more recently launched Vanguard S&P 500 ETF (NYSEMKT: VOO).

Buffett asserted that "by periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals." Indeed, that's consistently proven to be the case. In the most recent edition of S&P Global's SPIVA Scorecard, which measures professional fund managers against their benchmark indexes, it found 86.9% of large-cap stock funds underperformed the S&P 500 over the last five years after accounting for fees. That number climbs to 91% for the trailing 20-year period.

If someone had simply purchased $10,000 of the SPDR S&P 500 ETF or Vanguard 500 mutual fund on March 1, 1994 and automatically reinvested the dividends, they'd have $253,000 today. But that number could be significantly higher if they followed Buffett's advice exactly and kept investing periodically.

Investing for life

Buffett doesn't think an investor should simply put a pile of money into an index fund and call it a day. He suggested that investors space out their purchases and invest periodically.

This isn't dissimilar from what Buffett does with Berkshire Hathaway. He famously doesn't pay a dividend to shareholders. Instead, he aims to take all the profits of the conglomerate and reinvest them in new opportunities. Individual investors should constantly be investing their profits (like savings) into new investment opportunities as well.

If someone added just $100 per month to their original $10,000 investment in this SPDR ETF starting in April 1994, reinvesting the dividends along the way, they'd accumulate an additional 412 shares of the ETF, currently worth over $276,000. If they'd adjusted their monthly investment for inflation at the start of every year (so that they're adding $217.29 per month this year), they'd have accumulated nearly 530 additional shares worth more than $355,000.

That number can scale up or down depending on your means. But it illustrates the power of consistently putting away a little bit every month. So, even if you didn't have $10,000 to invest back in 1994, you could have built a significant amount of wealth just by adding a bit to this SPDR ETF every month.

There's no reason that the strategy won't continue working going forward. There's nothing particularly special about the period from 1994 to the present. The total return of the index fund since 1994 has averaged about 10.8%. That's slightly above the historical average returns of the S&P 500 and its predecessors going back to the 1920s, of about 10%. Even if there's some reversion to the mean, investors can still see excellent results.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, S&P Global, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.