Buffett’s advice

Part of Warren Buffett’s annual letter to shareholders appeared in Fortune magazine this week (click here to read the article).  It’s short and worth reading.

In it, Buffett spells out the investment advice that he and his mentor, Benjamin Graham, have spelled out for years.

“Investing is most intelligent when it is most businesslike.”

Buffett describes two real estate investment he made that have done well: one a farm in Omaha and the other a New York City retail property.  In both cases, the properties were purchased when no one wanted to own them, so he bought at very reasonable prices (10% yields with the potential for asset growth over time).

He was investing in real assets, not pieces of paper on an exchange.  He evaluated the cash flow potential relative to the price to be paid, and recognized a good deal with limited downside.  He didn’t care if others liked or didn’t like the price.  He didn’t care if they generated excellent returns right away.  He was thinking long term, and he was thinking about the specific properties and his ability to evaluate them.

“You don’t need to be an expert in order to achieve satisfactory investment returns.”

“Focus on the future productivity of the asset you are considering.”

“If you instead focus on the prospective price change of a contemplated purchase, you are speculating.”

“Forming macro opinions or listening to macro or market predictions of others is a waste of time.”

“Stocks provide you a minute-to-minute [quoted prices] for your holdings, whereas I have yet to see quotation for either my farm or the New York real estate.”

“Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well.”

“When…I buy stocks — which [I] think of as small portions of businesses — [my] analysis is very similar to that which [I] use in buying entire businesses.”

“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.”

“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 too do well.”  By “helpers,” Buffett means financial planners or investment advisers who don’t understand how to value businesses, or choose not to make the effort.

If you or your helpers don’t know how to value businesses, then a low cost index fund is the way to go.

Don’t try to time the market by getting in when it is “hot,” and out when things look “scary.”  You will do worse if you try.

“Price is what you pay, value is what you get.”

After Buffett dies, his advice to the trustee who will manage his wife’s money is to invest 10% in short term government bonds, and 90% in a very low cost S&P 500 index fund.  He’s putting his money where his mouth is.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Buffett’s advice