Warren Buffett’s 3 Most Profitable Pieces Of Advice

Warren Buffett’s 3 Most Profitable Pieces Of Advice

There is simply no telling how far stocks can fall in a short period. But an unsettled mind will not make good decisions

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Warren Buffett has once again spoken with more sage advice for the masses. His annual letter to shareholders, which is as unadorned as a Nebraska cornfield, as usual, is a bounty for all investors.

In this year’s Berkshire Hathaway letter, you don’t have to dig very deep to find the best nuggets. They are on pages 10 through 12.

Here are his three most powerful pieces of advice for Main Street investors:

— Fees Matter/Keep Costs Low. Although Buffett’s $1 million bet against a hedge-fund manager was won months ago, he reinforces that victory with some simple advice: Keep your investing costs as low as possible. That means you can invest more over time and avoid the money-losing strategies of most active traders.

Buffett’s bet, a company called Protege Partners a decade ago that he could get superior returns by simply investing in a bargain-priced stock-index fund, which held a static portfolio. Protege assembled a portfolio of un-named actively managed hedge funds.

In the early years of the bet, Protege’s funds did well, then fell behind and never caught up, weighed down by huge investment fees. The hedgies were creamed by a do-nothing fund: The index fund returned 126% over the decade, compared to a pathetic 27% for the hedge funds.

Warren Buffett (Daniel Zuchnik/WireImage)

“The five funds-of-funds got off to a fast start, each beating the index fund in 2008. Then the roof fell in. In every one of the nine years that followed, the funds-of-funds as a whole trailed the index fund.”

Buffett’s moral: “Performance comes, performance goes. Fees never falter.” You can buy nearly the entire stock and bond markets through index funds. Don’t spend more than 0.15% annually for management fees.

— Bonds Are Not Good Long-Term Bets. Sometimes investors have narrow views of risk. They almost always think that bonds are sure things compared to stocks. But risk comes in many forms.

Buffett, in talking about his Protege bet, discussed some bond investments he made. While they are fine for protecting your money in a short period of time, they are awful investments long term compared to stocks.

“Given that pathetic return, our bonds had become a dumb – a really dumb – investment compared to American equities. Over time, the S&P 500 – which mirrors a huge cross-section of American business, appropriately weighted by market value – has earned far more than 10% annually on shareholders’ equity (net worth).”

Bonds are fine for short-term cash and emergency funds. Treasury bonds won’t lose value if you hold them to maturity. The shorter the maturity or duration, the less risk they have.

But you need to know what kinds of risk you’re willing to take and focus on your investment time horizon.

“In any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.

Use bonds prudently, though. They are best for short-term goals like home down payments, home repairs or impending college bills. Nearly all bonds lose value if inflation or interest rates rise.

— Keep Your Head/Keep Investing. There’s been some scary stuff going in stocks this past month. Major indexes took a 10% hit as bond yields rose.

The Washington political climate is crazier and more unstable than ever. The Russians are up to some epic mischief. And interest rates and inflation could be headed up.

What should you do? Stay sane and keep investing, particularly when the headlines look bleak. Buffett even points to four periods when even his Berkshire shares lost between 37% and nearly 60% of their value between 1973 and 2009. And keep in mind that borrowing money to buy stocks is best left to the pros.

“There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

Although Buffett talks little about market timing, he’s always been a believer in buying when share prices dip or go on sale. “When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt.”

That means stay liquid. Build an emergency fund. And when share prices decline, buy more, which you can do through your 401(k). And skip the idea that you’re ever going to beat the market — or Warren Buffett — by trading or market timing.

“A final lesson from our bet: Stick with big, `easy’ decisions and eschew activity.”

Forbes.

Comments

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By 

Warren Buffett has once again spoken with more sage advice for the masses. His annual letter to shareholders, which is as unadorned as a Nebraska cornfield, as usual, is a bounty for all investors.

In this year’s Berkshire Hathaway letter, you don’t have to dig very deep to find the best nuggets. They are on pages 10 through 12.

Here are his three most powerful pieces of advice for Main Street investors:

— Fees Matter/Keep Costs Low. Although Buffett’s $1 million bet against a hedge-fund manager was won months ago, he reinforces that victory with some simple advice: Keep your investing costs as low as possible. That means you can invest more over time and avoid the money-losing strategies of most active traders.

Buffett’s bet, a company called Protege Partners a decade ago that he could get superior returns by simply investing in a bargain-priced stock-index fund, which held a static portfolio. Protege assembled a portfolio of un-named actively managed hedge funds.

In the early years of the bet, Protege’s funds did well, then fell behind and never caught up, weighed down by huge investment fees. The hedgies were creamed by a do-nothing fund: The index fund returned 126% over the decade, compared to a pathetic 27% for the hedge funds.

Warren Buffett (Daniel Zuchnik/WireImage)

“The five funds-of-funds got off to a fast start, each beating the index fund in 2008. Then the roof fell in. In every one of the nine years that followed, the funds-of-funds as a whole trailed the index fund.”

Buffett’s moral: “Performance comes, performance goes. Fees never falter.” You can buy nearly the entire stock and bond markets through index funds. Don’t spend more than 0.15% annually for management fees.

— Bonds Are Not Good Long-Term Bets. Sometimes investors have narrow views of risk. They almost always think that bonds are sure things compared to stocks. But risk comes in many forms.

Buffett, in talking about his Protege bet, discussed some bond investments he made. While they are fine for protecting your money in a short period of time, they are awful investments long term compared to stocks.

“Given that pathetic return, our bonds had become a dumb – a really dumb – investment compared to American equities. Over time, the S&P 500 – which mirrors a huge cross-section of American business, appropriately weighted by market value – has earned far more than 10% annually on shareholders’ equity (net worth).”

Bonds are fine for short-term cash and emergency funds. Treasury bonds won’t lose value if you hold them to maturity. The shorter the maturity or duration, the less risk they have.

But you need to know what kinds of risk you’re willing to take and focus on your investment time horizon.

“In any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.

Use bonds prudently, though. They are best for short-term goals like home down payments, home repairs or impending college bills. Nearly all bonds lose value if inflation or interest rates rise.

— Keep Your Head/Keep Investing. There’s been some scary stuff going in stocks this past month. Major indexes took a 10% hit as bond yields rose.

The Washington political climate is crazier and more unstable than ever. The Russians are up to some epic mischief. And interest rates and inflation could be headed up.

What should you do? Stay sane and keep investing, particularly when the headlines look bleak. Buffett even points to four periods when even his Berkshire shares lost between 37% and nearly 60% of their value between 1973 and 2009. And keep in mind that borrowing money to buy stocks is best left to the pros.

“There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

Although Buffett talks little about market timing, he’s always been a believer in buying when share prices dip or go on sale. “When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt.”

That means stay liquid. Build an emergency fund. And when share prices decline, buy more, which you can do through your 401(k). And skip the idea that you’re ever going to beat the market — or Warren Buffett — by trading or market timing.

“A final lesson from our bet: Stick with big, `easy’ decisions and eschew activity.”

Forbes.

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