At the beginning of the month Warren Buffett, also known as the Oracle of Omaha and recognized worldwide as one of the best investors, spoke about who would be his successor at the head of Berkshire Hathaway, one of the largest investment holding companies in the world.
Warren Buffett is considered one of the standard bearers of the value investing, an investment philosophy that is based on consistently obtaining positive returns by purchasing securities with good fundamentals at a price lower than their real value.
This type of investment is categorized within what is known as “active management”, since there is a management team They are the ones who actively choose the stocks or bonds in which to invest.
In this way and through these elections, they hope to be able to do better than the benchmark (reference index formed by a set of stocks and/or bonds against which the profitability of the investment fund is compared in order to evaluate its performance).
Stock indices
Many times the comings and goings of IBEX 35 They head the economics section of the news or take over the cover of the different economic newspapers in the country, but What exactly is the IBEX35?
The IBEX35 is the Stock index reference in Spain (same as the S&P500 in the United States or the DAX30 in Germany).
A stock index is formed with a set of listed shares in a specific stock market in order to analyze and reflect the variations of the different stocks in a single number.
In this way, the fluctuations of said index will reflect the evolution of the group of companies of the economy or sector it represents.
There are different methodologies for creating an index, but both the IBEX35 and the S&P500 are capitalization-weighted indices, which means that not all companies “weigh” the same in its construction.
To give us an idea, the three companies that have the most weight in the IBEX 35 are Iberdrola, Inditex and Banco Santander and between them they bring together more than 30% of the entire weight of the index, so its variations will be greatly influenced by the performance of these three values.
Index Funds
Now that we have seen what the stock indices We can understand the main characteristic of an index fund.
A index fund attempts to replicate a stock market index as faithfully as possible, with the manager carrying out passive management, unlike an actively managed fund which is managed by a team of managers who seek to obtain a return higher than that of the index through analysis and stock selection.
Advantages
The main advantage of this type of investment funds is its price since the commissions are substantially lower than those of an actively managed fund.
This is because the manager's work is much more simple since it only has to replicate an index and periodically readjust the portfolio seeking to replicate its behavior as accurately as possible (minimization of the tracking error).
Another of its advantages is the great diversification that they offer within the market or sector that they represent, since the fund will be invested in all the values that make up the index.
This diversification additionally gives us a risk minimization, an aspect that must always be taken into account when investing.
Different markets
But not all are advantages, index funds They may not be appropriate when investing in certain markets.
We can find markets or sectors in which investing in each and every one of the securities that comprise it is very inefficient and it would be a better option to select only certain companies.
Investing in this type of vehicle also requires a certain active management by the investor, since if a market does not perform well there will be no manager who will decide to make changes, so it must be the investor who must be aware of this type of case to mobilize their capital and transfer it to another fund where the future profitability may be higher.
There is no doubt that the index funds They are here to stay and little by little they have been gaining popularity largely due to their low cost.
As we have seen in this post It is a vehicle to consider and a possible alternative to active management, although not all that glitters is gold and they also have drawbacks.
Let us not forget that our main objective As investors it must be to maximize profitability while minimizing risk and many times to do this we have to combine different strategies and products. With the master in Financial Management, Accounting and Management Control, you can train in this area.
