Investment advice from Warren Buffett
While thinking about today’s post, I came across a presentation by Warren Buffett almost 12 years ago. In a Q&A format, the world’s most successful investor addressed a group of MBA students at the University of Florida. He answered questions about his investment philosophy. I can confidently say that his advice is just as valid today.
There were two things that stood out, which I wanted to bring some attention to.
1. Index funds are the simplest and most effective diversification tools
An “index fund” is a collective investment scheme (for example, a mutual fund) whose investment objective is to achieve approximately the same return as a particular market index, such as the S&P 500 Index. An index fund invests in the stocks or bonds of companies that are included in a selected index.
Consequently, when you buy an index fund you’ve purchased bits and pieces of the stocks and bonds that make up that index. This provides diversification and a way to avoid paying transactional fees for buying lots of stocks or bonds.
If I may quote Buffett:
If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than the world, then I believe in extreme diversification. I believe that 98 or 99 percent — maybe more than 99 percent — of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs. All they’re going to do is own a part of America. They’ve made a decision that owning a part of America is worthwhile. I don’t quarrel with that at all — that is the way they should approach it.
2. Practice passive investing
Two of the greatest threats to your investment portfolio are transactional costs and management fees. Over the course of 30 years, for example, such fees can eat up over 30% of your entire portfolio.
I truly believe that if you invest in low cost index funds, you will have an excellent return on your investment over the long term. The more you try to self manage your portfolio by selling certain securities and buying other ones, the more vulnerable you will be over the long run.
On this subject Buffett states,
Wall Street makes its money on activity. You make your money on inactivity. If everybody in this room trades their portfolio around every day with every other person, you’re all going to end up broke. The intermediary is going to end up with all the money. On the other hand, if you all own stock in a group of average businesses and just sit here for fifty years, you’ll end up with a fair amount of money and your broker will be broke.
He’s like a doctor who gets paid on how often he gets you to change pills. If he gives you one pill and it cures you the rest of your life, he’s got one sale and one transaction, that’s it. But if he can convince you that changing pills everyday is the way to great health, it’ll be great for him but you’ll be out a lot of money and won’t be any healthier.
God Bless Warren Buffett! He is the most humble, genuine person you will ever find.
Thanks for posting this. Even though today’s post is common sense advice to most investors who’ve been in the market for a while, it’s great guidance for those who are in the process of getting their feet wet.
I’ve enjoyed coming back to your blog. I like the clean look.