By: Matt Garrott
Berkshire Hathaway recently released Warren Buffett’s annual letter to shareholders and it is required reading if you have any interest in investing, stocks, money, folksy wisdom, talking lizards, or deeply discounted furniture. Really, just do yourself a favor and read the letter.
This month’s Tip From the Pro on our Scorecard is from the letter: “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.” The timing of his pro-America statement is intentional as we get deeper into an election year where the candidates are all working to convince us how awful things are and the only solution is to elect them.
Here are a few other quotes from recent letters that are especially relevant to those who take investing seriously.
“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. A low-cost S&P 500 index fund will achieve this goal.”
“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.
“My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will.” … “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 suggest Vanguard’s.) 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.”
“Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy.”
“There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship.”
Warren Buffett is lauded in investment circles because of his track record of success, but he has had his doubters. During the tech bubble, Buffett did not buy in to the hype of internet stocks. In the depths of the financial crisis, he wrote an editorial in the New York Times saying to buy American. Both times people wondered whether he had finally lost his touch. Both times Buffett came out looking like a genius.
Buffett says it does not pay to bet against America. What about betting against Buffett? A hedge fund manager from Protégé Partners did just that in 2008 after Uncle Warren threw down the gauntlet saying the S&P 500 would beat hedge funds over the next 10 years. With two years to go, the S&P 500 is up 65.7% while the hedge funds are up 21.9%.
