Oh, if only Warren Buffett had a blog – for now, you’ll have to settle for me, and Buffett’s annual shareholder letters…
A few days prior to the Berkshire Hathaway annual meeting where he releases said letters, Warren Buffett (quite arguably the greatest investor and businessman of all-time) gave a sneak peak of his 2014 shareholder letter with a few new nuggets of wisdom that each and every one of us can benefit from – from beginners to pros (although I think beginners can particularly benefit from it).
Now, before you stop reading because you have a fear of investing or find it too complex, note that Buffett’s advice couldn’t be more simplistic, and he even provides an investment pick.
To set the stage for his advice, Buffett first discusses two real estate investments that he made a few decades ago:
- a 400-acre farm in Nebraska in 1986 for $280,000 right after a massive bubble burst in farm values
- a retail property in New York, right next to NYU, in 1993, before the largest tenant’s outdated bargain contract was to expire in a few years
In both cases, he had determined the current and future value of the properties by the earnings they could produce, they’ve produced significantly more value as time has passed, and he still owns them today despite multiple panicky markets and a few burst bubbles.
The examples show a few of Buffett’s guiding investment principles, in practice:
- evaluate and know the present and future value of what you are purchasing
- look for opportune times to buy
- HOLD when everyone else is selling
- In general, use other people’s manic behavior to your benefit
On the first point about valuation, he then goes on to admit,
“Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.”
What are those who haven’t made business valuation a priority to do?
“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 industrial 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 nonprofessional 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.”
I have come to a similar conclusion in my own approach to investing. Low cost passive index investing is seemingly the best option for most of us. Most professional investors/insiders can’t beat the returns, so how can you expect to? Ironically, Buffett’s Berkshire Hathaway has trounced the S&P 500’s return over the last 2 decades.
He later, indirectly, gives more specifics on what he would invest in were he a regular Joe/Jane, when explaining what he will tell his trustee to do with his estate,
“Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s. (VFINX)”
I’m going to one-up Buffett on this one. VFINX has an expense ratio of 0.14%, which is insanely low by most measures. But the identical Vanguard Admiral Shares version, VFIAX (which requires a minimum $3,000 investment), has an expense ratio that is less than a third at 0.04%. The ETF version, VOO, also has a 0.04% expense ratio, however, no investment minimum (and it trades for free if you have a Vanguard account). For more info, check out my VOO, VFINX, VFIAX comparison.
I also think it would be wise to diversify a bit more and invest internationally versus being focused only on American companies with the S&P 500 (even if many have international business operations). Just as you wouldn’t want to put all your money in one stock, why put all of your money in one country’s economy? I’ve provided some further thoughts on international stock diversification in the past.
The second part of the equation is when you should invest. He ties this back to his farm story:
“accumulate shares over a long period and never sell when the news is bad and stocks are well off their highs… ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.”
Great advice. In fact, Warren Buffett was bullish on the stock market back at its lowest of low points during the Great Recession. Those who had listened would be close to tripling their investment at those levels.
He wraps everything up with a huge shout out to the O.G. of investing, Benjamin Graham and his classic investment book (to which Buffett attributes most of his investing success), The Intelligent Investor,
“Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses).”
Oh Warren – always the charmer.
All-in-all, outstanding advice that would serve each and every one of us well.
What are your favorite Buffett nuggets of wisdom?
Thanks for the investment advice!
International markets are not necessarily correlated to U.S. markets, but the S&P 500 represents the vast bulk of the U.S. economy. If the S&P 500 tanks, it will be a global catastrophe, and a position in international markets is not going to help you. The world economy’s cookies are in our basket, and if our cookie crumbles, everyone else’s does too.
Sure, in the nuclear scenario you’ve presented, it doesn’t matter where your investments are – everyone is screwed. But that’s a rare scenario that shouldn’t be motivation to limit diversification.
I agree, most hardcore investors who study the market daily don’t beat the S&P. Why? Because no matter how much research you do you can never fully grasp how people will react to news. The market is emotion driven, with sell offs and buying frenzies happening over the most ridiculous things.
Great post, G.E. Warren Buffett is truly an American icon. Thanks for encouraging readers to take a look at his letters. Good stuff.
My favorite quote by him is “Rule # 1: Never lose money. Rule # 2: Never forget rule # 1.”
If you lose 50% of your portfolio value, it takes a 100% gain to get back to where you started. It’s important for everyone – including young people – to properly diversify their portfolios and stay away from unnecessary risk. There is too much focus on making crazy high returns in the stock market when, in reality, strategies like that get you burned.
Warren is the classic long-term investor and young people would be wise to follow in his footsteps.
Yeah I totally agree with his principles. I’ve just finally started investing with a Betterment account thanks to this blog. It’s got the ability to do exactly what he suggested as an index option, except for me it’s better because it’s automated, diversified, and allows me to invest $100 a month very easily without huge fee’s.
I’ve also got a tradeking account for a couple of companies I see a 5 – 10 year growth pattern on which aren’t cost prohibitive now. One of them is Invensense (wearable technologies/internet of things play) , and the other is Solazyme (renewable biofuel company poised for growth as production ramps up later this year).
Those are the only individual ones I’m messing with. I know odds are i’ll make more $ from the index fund, however I believe the two companies will still be profitable for me down the road, plus it’s fun doing the research, and reading the 10-K reports. If those make money I’ll feel a bit more proud about that than a broad index fund, if that makes any sense lol.
I’ve made it to Omaha 3 times for the Berkshire Hathaway shareholder’s meeting. It is incredible to hear the wisdom and insight straight from the horse’s mouth, particularly when the horse is one of the richest people alive.
I always appreciate his use of book value per share as a measure of the worth of the company. Many analysts look for the quick win, but using book value is better suited for long-term gains and investments.
I have BRK.B shares and a low-cost S&P 500 index fund, amongst other investments, in my retirement accounts. I think Warren and Charlie (and their predecessors) will keep doing great for me for a very long time.
I appreciate your thoughts on the investment. Newbies should be very careful while making any kinds of investment as a lack of knowledge could cost a lot to the investor. So, newbies should take assistance from experienced professionals as well as could do some research on the internet prior to making any kinds of investment. In my point of view, investment in real estate is more profitable as it assures steady cash flow to the investor. Besides, risk factors associated with such kinds o investment is also comparatively low.