For finance tragics like me, the annual release of Warren Buffet’s shareholder letter is an exciting event.
By independent financial planner Tim Mackay.
As the world’s most successful investor (worth US $63.4 billion), he has an incredible ability to explain complicated financial concepts in terms your grandma could understand.
Every year since 1965 in late February or early March, Warren Buffett releases a 12,000-word document in plain English, devoid of fancy diagrams. He writes it assuming his audience are distant relatives who only review their investments once a year and ignore it for the rest of the year.
I believe that when the second richest man in the world (behind his friend Bill Gates) offers you free advice, you should listen. His golden rules and lessons are invaluable investing insights for everyone.
Buffett’s 2014 shareholder letter is no different and it includes several investing gems that many in the finance industry won’t enjoy reading.
Regular readers of this column will be aware that we have long been active advocates of a core and satellite investing approach with exchange traded funds (ETFs) at the core of portfolios. To recap, ETFs are low cost passive investments traded on the ASX providing you with instant diversification and crucial asset class exposure. There is currently $11 billion held in ETFs in Australia with self-managed super funds (SMSFs) the biggest users. For more, read ‘Core & Satellite Investment Strategy’ in Charter, October 2012.
Below are three of Buffett’s deeply held investing views from his 2014 shareholder letter.
1. “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.”
I am one of those many ‘helpers’ that Buffett refers to. As a group, we hold ourselves out as experts on many things that are truly beyond our control and, for many, our expertise.
From my active stock selection experience at Deutsche Bank, I converted a number of years ago to this same elegantly simple approach to low-cost investing. If you want some ideas, have a look at IVV or VTS on the ASX. As the available Australian equivalent to the low cost S&P 500 investments, they returned 53.5 per cent to 55 per cent (in AUD terms) for my clients in 2013.
2. “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 per cent of the cash in short-term government bonds and 90 per cent 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.”
In recognising his own mortality, Buffett entrusts his $63.4 billion fortune left to family and charities to simple low cost index investments.
Remember the incredibly successful industry fund ‘compare the pair’ advertisements?
They compared funds paying high fees to advisors (and commissions and kickbacks) to those that don’t.
Why was this campaign so successful? Because it was true.
Buffett highlights that if you can reduce investment fees, returns will be superior.
3. “You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognise your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick ‘no’.”
I can add nothing to this wonderful piece of advice from Buffett. Its genius lies in its elegant simplicity. If you are interested in finance, investing, business or corporate governance, I believe Buffett’s letters to shareholders are a great place to start. You can read them all at berkshirehathaway.com
Every article on Buffett invariably ends with some of his most famous quotes. As promised in the title, I’m more partial to the octogenarian’s lesser-known sex advice!
BUFFETT’S TOP 5 SEX TIPS
- Investing in a downturn: “I feel like an oversexed man in a harem. This is the time to start investing.”
- Being focused: “You know, if I’m playing bridge and a naked woman walks by, I don’t ever see her.”
- Due diligence: “Other guys read Playboy, I read annual reports.”
- Your job: “You want to have a passion for what you are doing. You don’t want to wait until 80 to have sex.”
- Markets: “A bull market is like sex. It feels best just before it ends.”