Buffett has a message for non-professionals
The worlds most recognised investor, business magnate, and philanthropist, Warren Buffett says that the typical investor does not need to study the particular business prospects of specific firms to make money.
Buffett, published his annual letter to the shareholders of his Berkshire Hathaway Inc on the weekend, which included nuggets for the amateur investor.
“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,” Buffett wrote.
“I have good news for these non-professionals: The typical investor doesn’t need this skill.”
Buffett said that in aggregate, American business has performed well over time and will continue to do so.
He noted that in the 20th Century, the Dow Jones Industrials 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,” he said.
“The goal of the non-professional 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,” the investment guru said.
“A low-cost S&P 500 index fund will achieve this goal,” he said.
The “when” is also important, Buffett stressed. “The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur.”
Buffett referred to the late Barton Biggs’ observation: “A bull market is like sex. It
feels best just before it ends.”
“The antidote to that kind of mistiming is for an investor to accumulate shares over a
long period and never to sell when the news is bad and stocks are well off their highs,” Buffett said.
Following those rules, the “know-nothing” investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results, Buffett said. “Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better longterm results than the knowledgeable professional who is blind to even a single weakness.”
He noted that if “investors” frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.
“Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.”
According to Buffett, his money is where his mouth is: “What I advise here is essentially identical to certain instructions I’ve laid out in my will”.
He said that one bequest provides that cash will be delivered to a trustee for his wife’s benefit.
“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.
“I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers,” Buffett said.
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