The investor so prosperous that his name has become synonymous with successful, long-term, value investing. Indeed, if you had purchased $US1,000 in Berkshire Hathaway (Warren’s company) stock when he first bought it in 1964, your investment would be worth more than $US12 Million today.
Unsurprisingly, much is written about his methodology, and how he has been able to achieve such terrific outperformance, for such an extended period of time.
Helpfully, Warren often explains his investment approach, dropping small bits of wisdom for us mortal investors to disseminate.
1. Overcome your fears and take advantage of market capitulation
Buffett has previously stated that “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”
This is a classic contrarian viewpoint, expressing the view that the biggest of investments should be made when economic downturns are at their worst; when prices are at their lowest. Although this sounds like an easy bit of advice to follow, it requires both patience and courage, with an investment outlook longer than most are willing to consider.
2. Spending more for investment advice and management is not a ticket to wealth
Buffett believes that “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.”
Here he expresses the view that if you purchase and indexed fund, you will outperform a hedge fund due to the fees and charges of the hedge fund. He is not saying that an index fund will achieve better returns than an exceptional money manager, only that those same money managers will underperform net of fees.
3. “Price is what you pay; value is what you get”
Buffett wrote this famous bit of advice in the 2008 Berkshire Hathaway shareholder letter; it highlights his subscription to the value school of investing. He is telling us to look past the ticket price of an investment, to assess the intrinsic value of the investment, which he defines as “the cash that can be taken out of a business during its remaining life.”
Whilst intrinsic value is not necessarily easy to calculate, it is important to estimate, to be able to assess the level of under or overpricing of a particular investment, relative to others. In fact, Buffett believes that intrinsic value estimations offer “the only logical approach to evaluating the relative attractiveness of investments and businesses.”
Although Buffett’s advice is coveted by the wider investment community, his advice is targeted towards individual, private investors. He is a firm believer in taking control of your own money and investment decisions, because he sees this as the most efficacious way to manage money. To those willing to control their own money, he has some advice:
“The years ahead will occasionally deliver major market declines — even panics — that will affect virtually all stocks. No one can tell you when these traumas will occur …During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted”
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