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

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.

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.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

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  • Jonathan Tedd

    Trouble is the game is rigged isn’t it? How can small retail investors hope to win when you have central bank pumping in $1trn a year plus in QE? This is a game for the big boys. Here in the UK it’s deja vu all over again,

    If there’s one lesson in today’s piece it is this: buy property – you will always ALWAYS have a yield no matter how small. Shares? Just bits of paper. The trick is to buy it cheap, and in the UK that is not now.

  • mikeT

    Add to the negatives, national debt (has this been forgotten?) and the Ukraine (have the markets woken up today to the consequences of Russian intervention?).

    • Aquinas

      They just want us to forget about the current pitfalls! There has been a very positive economic vibe (unjustified) being broadcast by the media this year.

      I remember before the crash of 2008 that there was an explosion of TD waterhouse outlets on the high street. I believe that this was an attempt to expose working class people to the stock market for the up and coming crash. Warren Buffett is being used as advertising showing that owning shares is hugely profitable. I believe that once again the elites are trying to expose the last remaining middle class to another crash. I see the same with gold buying shops (in reserve) which I have noticed has had a resurgences in the last 6-12 months. Getting the general population to sell the last remaining gold.

      In short I believe the media is undermining the choices of average person.

  • Radicalman

    I read MW each day with a mixture of disbelief and amusement because even over a short period of time the articles are so contradictory. But I guess that is what you as financial journalists need to do – sell more subscriptions to people who believe that they need a constant stream of tips and advice to be successful.
    Like Warren Buffett you might serve your readership better if you too had a solid long term investment philosophy which reflected your firmly held beliefs rather than the tsunami of hunches and speculative ideas that you throw up. Today it’s gold. Tomorrow it’s Fracking (btw do you have any clue at all how massively expensive it is to extract oil in the UK in this way?).
    As the old saying goes “if you’re so smart why ain’t you rich?”. Warren Buffett is a skilled visionary investor. You are journalists.

    • Rabster

      So well said.
      At one time I felt MW did guide investors to long term investing but rather like the above article (Bowsher must be resting his hands today) it draws you in and then at the end you get the real reason for it ….a future subscription scheme.
      Another “the end is nigh, protect your money the way we think you should” scheme , I bet !

    • haircut

      Good comment Radicalman

      t’s funny how the article starts off with Warren Buffett and ends up advertising a newsletter! – Brilliant

      Perhaps MW should have been recommending tracker funds 5 years ago when Buffett said the market was cheap ?

      Right, must get back to reading my End Of Britain Report. Ha Ha

  • mikeT

    @Radicalman As far as I know, fracking in US has resulted in natural gas at $4/unit while we pay $14/unit (roughly). Why should extracting in the UK be so much more expensive?

  • Jake

    So, we are saying that one should always look to the return on an investment, not its price? Remind me of the return on gold these days.

  • Shoreditch

    The observation that MW splatters its readership with contradictory articles from one week to the next is food for thought, however, if they stuck to one theme, rather than looking for the investment angles in world, economic or company events then we would miss out on the breadth of insight; I suspect that we’d soon tire with it and cancel our subscription. I took out a subscription with Tim Price but I could only take so many monthly reminders to insure myself with gold and have a balanced portfolio (that contained a significant number of obscure defensive funds that were almost impossible to put in a UK SIPP) so I cancelled after the second quarter.

    I agree that the constant barrage of endlessly over-verbose ‘End of Britain’ report emails/popups and various other paid for subscriptions rather cheapens what is, for me, a good source of information, thought provocation and occasional tips that I follow up on.

  • haircut

    Brilliant link John

    I found this bit particulary interesting, where Warren B writes:

    I tell these tales to illustrate certain fundamentals of investing:

    ……. Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.

    Do you think that the US market is expensive at the moment? Or is Japan and Italy cheap?

    • haircut

      No macro reply !

      What about a return of the commodities super cycle?

      or… emerging markets that may have further to fall ?

      or…. a market plunge ?

      or….wobbling into crisis? ……..or crashing emerging markets? etc etc

      Maybe I’m wrong but is this all not a little macro?

  • Radicalman

    I’m rather surprised that my brief note excited such reaction , however for
    mikeT who asks “Why should extracting (oil) in the UK be so much more expensive?” (than the USA), the answers is just ask ANY experienced oil engineer – as I did.
    For Jake who wrote “So, we are saying that one should always look to the return on an investment, not its price? Remind me of the return on gold these days.” I say the only thing which matters in assessing investment quality is the yield from the discounted after tax cash flow from start to finish. Buying price, selling price, income flows, tax flows and timing are simply components in the calculation. But you probably knew that.

  • mikeT

    @Radicalman – I do know about discounted cash flows and am pleased to meet another believer. However, I don’t know any experienced oil engineers. Would you mind explaining? And how important is The State owning mineral rights in the UK but not in the US?