What do Tesco and tracker funds have in common?

For a start they are both liked by Warren Buffet. Like Warren I like both of these investments. Like Warren, I am smarting from my losses in Tesco. Tesco has been a painful lesson.but I don't believe that it negates the advice to be long tracker funds.

In his annual letter to Berkshire shareholders, Warren Buffet says:

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain
instructions I’ve laid out in my will. My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee
managers.

Just prior to making this point, he notes:

I have good news for these non-professionals. The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th Century, the Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st Century will witness further gains, almost certain to be substantial.

The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal. That’s the “what” of investing for the non-professional.

The “when” is also important. The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’ observation: “A bull market is like sex. It feels best just before it ends.”) The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long term results than the knowledgeable professional who is blind to even a single weakness.

If “investors” frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties. Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit.

So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

My observations:

- I am hanging on to my holdings in Tesco. At 400p, Tesco's properties were worth as much as the then  market capitalisation of the company. At 170p, this is not the time to blink but to focus on the tangible value in this business. It will take a long time for a competitor to build a retail footprint as dominant as Tesco's position in the UK. Tesco needs to get back to basics and focus on what made it successful - the right products at the right price. Asda has stolen this position from Tesco and Tesco need to claim back that position.

- UK plc is fundamentally still overvalued compared to US Inc. The US economy is a giant when it comes to being flexible as being able to reinvest itself. The UK economy has fewer weapons in its armoury. Don't fight the US - owning a broad cross section of US companies at the current time is probably the best asset allocation decision one could make today. Doing this via trackers funds is probably the second best investment decision one could make.

- Not all trackers fund are created equally, make sure you shop around. When Vanguard launched their trackers funds in the UK the incumbents were forced to drop their asset management fees. The barriers to entry to the 'low-cost' tracker business are high. Choose a tracker fund that is managed by one of the largest providers and you should generally benefit from the best fees as well as low total expense ratios. Globally the top 3 managers would be: BlackRock, State Street and Vanguard - the latter is also liked by Warren.