warren buffettREUTERS/Rick WilkingBerkshire Hathaway CEO Warren Buffett pauses during a bridge game in Omaha May 5, 2013 the day after the company’s annual meeting.

Warren Buffett is always going to be a master stock picker, and he is able to get special acquisitions due to the terms he can offer. As he said in this year’s letter, he can usually tell within five minutes if he is interested in a company’s acquisition terms. For the rest of us, getting diversified exposure to stocks that have those characteristics via an index-based strategy can be a compelling strategy.

Another segment of Buffett’s letter advises us to follow the principles of Jack Bogle and follow low-cost1 diversified index-based strategies. Buffett wrote:

Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. …

The commission of the investment sins listed above is not limited to “the little guy.” Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades.

If I combine Buffett’s two principles: focusing on stocks with high returns on equity and little to no debt and his belief in the “unsophisticated index” approach to investing, I think of the WisdomTree U.S. Dividend Growth Fund (DGRW), whose underlying investment strategy selects companies based on their high ROE and high ROA characteristics.

Continue Reading