I’m IGNORING Warren Buffett’s advice with the FTSE 100


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Most investors should forgo individual stocks and invest into diversified indices, such as FTSE 100. That’s Warren Buffett’s advice.

According to Buffett, figuring out which businesses will outperform the index is too difficult for 99% of investors. Thus, they just have to buy the entire index.

I’m a big fan of Buffett. But in the case of the FTSE 100, I don’t think that buying the index is a good idea for my portfolio.

Overall, I found the FTSE 100 a bit boring. But hidden within the underwhelming index are some stocks that I find very attractive investment propositions.

Index

To say that the FTSE 100 has been a disappointment over the last five years is to put it mildly. The index is currently about 1% lower than in August 2017.

This does not mean that someone who invested in the FTSE 100 five years ago will lose money. By itself, the index rate does not take into account the dividends that investors will receive.

Including dividends, the FTSE 100 has provided investors with a 21.5% return over the past five years. So a £1,000 investment in the FTSE 100 five years ago would be worth under £1,250 today.

With inflation around 9%, investments that earn around 4% per year do not look attractive. So following Buffett’s advice and buying the index in the case of the FTSE 100 seems unattractive.

FTSE 100 shares

While the index as a whole is uninspiring, there are some stocks in it that have generated tremendous returns for shareholders. experienced (LSE:EXPN) is a great example.

Over the past five years, Experian’s share price has increased by about 91%. Therefore, a £1,000 investment in Experian would be worth at least £1,910 today.

In addition, Experian shareholders will receive dividends for the last five years. This will amount to around £126.

Therefore, an investment in Experian stock will yield approximately four times the FTSE 100. That’s why I have Experian stock in my portfolio.

Not just Experian. Other stocks, including Checkers, Crodaand London Stock Exchange Grouphave also produced similar results.

Ignoring Warren Buffett

Warren Buffett argues that ordinary investors should invest into a diversified index, rather than buying individual stocks. In the case of the FTSE 100, I think it’s better to look for specific opportunities.

Frankly, Buffett’s reason for recommending the index is not that no individual stock will outperform the broader index. Most investors cannot determine which stock will perform best.

But I still disagree with Buffett here. Companies like Experian, Halma, Croda, and Londong Stock Exchange all have enough common features that should give casual investors like me a decent opportunity to identify them as winners.

Each of the businesses mentioned generates significant cash using relatively few fixed assets. This gives them an advantage which, I believe, means that they will continue to do well in the future.

That’s why I ignored Warren Buffett’s advice with the FTSE 100. I kept buying individual businesses that had a long-lasting competitive advantage – as Buffett himself did in his own investments.