Much has been written over the years about how to invest like Warren Buffett. The irony is that Buffett himself has consistently said that the vast majority of investors should not try to copy him at all, but simply invest for the long term in low-cost index funds. (1)
Every year, Buffett produces an annual letter for shareholders in his company Berkshire Hathaway. In it, he likes to include advice for ordinary investors.
In his latest shareholder letter, released last Saturday, Buffett explains that the advice is aimed at people like his younger sister Bertie — intelligent people who want to make smart decisions with their money. (2) “She is sensible — very sensible — instinctively knowing that pundits should always be ignored,” Buffett writes of Bertie.
“After all, if (a pundit) could reliably predict tomorrow’s winners, would (they) freely share (their) valuable insights and thereby increase competitive buying? That would be like finding gold and then handing a map to the neighbours showing its location.”
So, apart from ignoring pundits, what advice for investors does Buffett’s latest letter contain? Here are six key takeaways.
1. Avoid costly errors
Warren Buffett uses this year’s letter to reinforce one of his core beliefs: successful investing is much less about making great moves than avoiding costly errors. “Never risk permanent loss of capital,” he writes this time. “Thanks to the American tailwind (i.e. the returns delivered by US equities) and the power of compound interest, (investing) has been — and will be — rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes.”
2. Don’t speculate — invest
Another theme Buffett returns to in his latest letter is the importance of investing rather than speculating. “Though the stock market is massively larger than it was in our early days,” he writes, “today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reason, markets now exhibit far more casino-like behaviour than they did when I was young. The casino now resides in many homes and daily tempts the occupants.”
3. Be wary of claims about outperformance
One of the reasons Buffett has given for recommending low-cost index funds is that, although active funds offer the potential for outperformance, only a very small proportion of funds succeed in beating the market in the long run after costs. Even Berkshire Hathaway, he acknowledges, is unlikely to perform anything like as well as it has in the past. “There remains only a handful of companies in this country capable of truly moving the needle at Berkshire,” he writes. “Outside the US, there are essentially no candidates that are meaningful options for capital deployment at Berkshire. All in all, we have no possibility of eye-popping performance.”
4. Invest in stocks — and stay invested
There are few if any, more outspoken advocates of equities than Warren Buffett, and he sees no reason not to invest in them now. “I can’t remember a period since March 11, 1942 — the date of my first stock purchase — that I have not had a majority of my net worth in equities… And so far, so good,” he writes. “The Dow Jones Industrial Average fell below 100 on that fateful day in 1942 when I ‘pulled the trigger’… Soon, things turned around and now that index hovers around 38,000. America has been a terrific country for investors. All they have needed to do is sit quietly, listening to no one.”
5. Don’t be tempted to pick stocks
Another important principle of Buffett’s is to “know what you don’t know”. Buying and selling the right stocks at the right time is very difficult. Very few investors manage to do it with any consistency, and that includes the professionals. Most investors, he says, shouldn’t even try to pick individual companies. “Within capitalism,” he writes in this year’s letter, “some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict who will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen.”
6. Stay calm when others panic
Although he still strongly believes that equities are the most reliable route to long-term wealth, Buffett has warned many times of the danger of panicking when markets fall sharply. That risk, he says, has not gone away; indeed it may be even greater now than it used to be. “Markets can — and will — unpredictably seize up or even vanish as they did for four months in 1914 and for a few days in 2001,” he writes. “If you believe that American investors are now more stable than in the past, think back to September 2008. Speed of communication and the wonders of technology facilitate instant worldwide paralysis, and we have come a long way since smoke signals. Such instant panics won’t happen often — but they will happen.”
Remembering his friend Charlie Munger
It would not be right to finish without mentioning Charlie Munger, Warren Buffett’s right-hand man, who died in late November, just a few weeks short of his 100th birthday. Saturday’s shareholders’ meeting was the first since Munger’s death.
Buffett paid tribute to his late friend and colleague, describing him as “part older brother, part loving father”. Munger, he said, was the “architect” of Berkshire Hathaway all along.
Like Buffett, Charlie Munger generously shared with others his wisdom on investing, business and life in general. They are both remarkable individuals, and they’ve done investors a great service. (3)
This article is produced by us for Financial Advisers who may choose to share it with their clients. Timeline Planning and Timeline Portfolios do not offer direct-to-consumer products.
Robin Powell is a journalist, author and editor of The Evidence-Based Investor.
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