Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with management of the highest integrity and ability. Then you own those shares forever. I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.

June 13, 2010

ask Charlie: How can I get rich

Pabrai: Well the best thing for an individual investor to do is to invest in index funds. But even before we go there, you know, Charlie Munger was asked at one of the Berkshire annual meetings by a young man, "How can I get rich?" And Munger's response was very simple. He said, "If you consistently spend less than you earn and invest it in index funds, dollar-cost average," because you're putting in money every paycheck, he said, "that in, what, 20, 30, or 40 years, you can't help but be rich. It's just bound to happen."
And so any individual investor, if they just put away 5%, 10%, 15% of their income every month, and they just bought into the low-cost index funds, and just two or three of them, to split it amongst them--you're done. There's nothing else to be done. Now if you go to active managers, the stats are pretty clear: 80% to 90% of active managers underperform the indexes. But even the 10% or 20% who do, only one in 200 managers outperforms the index consistently by more than 3% a year. So the chances that an individual investor will find someone who beat the index by more than 3% a year is less than 1%. It's half a percent. So it's not worth playing that game.


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