Warren Buffett bugs me – but his latest investment tips are must-reads

published 27 February 2014

14-02-27-warren-buffet — Buffet: keep your costs minimal

I can be awfully cynical about Warren Buffett sometimes.

There's something about that folksy, down-home, man-of-the-people persona, and the gushiness of his fan base.

It doesn't sit well with the reality of being the man that even Goldman Sachs, the vampire squid' of legend, comes running to when it gets into trouble.

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But at the end of the day, that's all showbiz. What matters is that Buffett is a brilliant investor, and better yet, he writes extremely well on the topic.

His latest letter contains two key lessons that will definitely change your investing for the better if you haven't already learned them

Lessons from Warren Buffett's property investments

The latest excerpt from Warren Buffett's annual letter to Berkshire Hathaway shareholders, published in Fortune magazine, tells the tale of two property investments he made.

You can and should read the whole piece.But here's what it boils down to. Buffett bought a farm on the cheap after one recession. Then he bought some retail property in New York after another one.

With the help of some trusted experts, he looked at the business case for both. He saw that the returns looked good, even on a conservative estimate. So he bought them, made loads of money, and still owns them decades later.

Good for him, you're thinking. But what can I learn from Buffett's good fortune? I'd say there are two main takeaways both critical to being a better investor.

Firstly, he points out that he ignored the broader economic backdrop. He didn't think: "property prices are bound to go up, I'll buy now." Instead he looked at the earnings these properties were likely to generate in the future. On that basis, they looked cheap, so he bought in.

This is important. It's the way you should look at any investment, from shares to bonds. It's not about asking: "What will the price be tomorrow?" It's about asking: "Does this represent good value, given the returns I can realistically expect from it?"

This seems simple. Yet, as Buffett points out, with share prices being barked at you from the TV every other minute, it's easy to get caught up in the sense that you are missing opportunities, or that your hard-earned wealth might be at risk.

In short, invest in businesses because they're good value, not because the price is going up.

The financial industry wants you to trade like a maniac

Secondly, Buffett flags up the importance of keeping "your costs minimal".

As he puts it, if farm owners "frenetically bought and sold farmland to one another, neither the yields nor the prices of their crops would be increased. The only consequence would be decreases in the overall earnings realised by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties."

The financial industry wants you to trade like a maniac. It gets a bite of your money every time you do. But if you take the time to make a sensible, considered investment decision in the first place, you won't be panicked into doing anything rash.

Successful investing for people who aren't Warren Buffett

This is all very well. But what if you're a normal human being, and not someone like Buffett, who actively loves the process of analysing businesses?

As far as he's concerned, there's a simple solution. Invest in a cross-section of American businesses by sticking your money in a cheap S&P 500 tracker. If you invest regularly, then you don't have to worry about market timing. Any short-term losses made by buying near the highs will be compensated for by gains made by buying in near the lows.

There's a lot to be said for this. The truth is that for many people, simply even establishing a monthly, low-cost savings plan would greatly improve their long-term financial outlook. And if you have a long period of time to save over a decade or more then saving regularly in shares has historically produced better returns than cash.

But I think you can do better than that, even as a non-specialist. Buffett is right to focus on cheap tracker funds. But he ignores one great benefit of such funds you can use them to buy into a very wide range of assets, not just US or British stocks.

It's really easy to build a diversified portfolio that has exposure to shares across the globe, and also to property, bonds, and gold. All without paying a fortune in fees, or even having to spend a lot of time setting the thing up.

That reduces the risks of having all your money in one very over-valued asset class at any given moment. Which in turn should make it even easier to sleep at night while your money steadily accumulates.

My colleague Phil Oakley takes this approach in his Lifetime Wealth newsletter. Phil has just finished building a complete core portfolio that is designed to withstand most of what the economy can throw at it. We'll be telling you more about this in the near future so keep an eye out.

I do think this point about diversification is particularly important right now. There's a lot of frankly nutty-looking stuff going on in the investment world at the moment.

Stupidly expensive deals are being done in the tech sector. Valuations are being put together on the basis of rosy future scenarios one investment bank analyst even used the word utopia' in his valuation model of Tesla the other day. (Interestingly enough, Tesla's looking to raise funds, and said investment bank is in the running to get the business).

Meanwhile, China's financial system is looking ever more rickety. And markets can't seem to make up their mind about whether the taper' is really happening or not, and what it means if it does.

In short, conditions look ripe for a slip-up' of some sort. Maybe nothing will happen. But it's worth being prepared for if it does.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.