If you were making a list of the greatest investors of all time, Warren Buffett would have to be at or near the very top. During his career, he has made billions for himself and the shareholders of his company, Berkshire Hathaway.
For decades, Buffett has written annual letters to those shareholders. Although the letters act as updates regarding what’s happening with the company, they also offer valuable insight into how Buffett thinks, making them useful reading material for anyone who wants to get better at investing.
The latest letter only just came out. Here are three of the most useful investing tips that it had.
Keep Your Fees to a Minimum
In this year’s letter, Buffett discussed a bet of his. During the Recession, specifically in December of 2007, Buffett said that he believed an index fund for the S&P 500 would have a greater return than the Wall Street experts – in this case, he chose five hedge fund portfolios – over a time frame of 10 years. He was able to check on that bet now that it was the end of 2017. The index fund earned a return of 8.5 percent per year, on average, which was much higher than any of the hedge funds.
Investors often spend far too much on fees, and those fees eat away at their returns. High-fee hedge funds are one example, but another is trading too often. If you’re constantly buying and selling stocks, those fees can take you from a modest return to barely breaking even. That’s one reason why experts typically advise against day trading, because you need to make a far-above-average return to outweigh all the fees you’ll pay. Buffett’s bet shows that for the highest return, the optimum strategy is purchasing a range of different stocks and letting them be.
Remember that Stocks Are More than Just Ticker Symbols
Buffett reiterates in this letter something that he has spoken about time and time again – when he (or in this case, Berkshire Hathaway) invests in a stock, he’s doing so because he believes in that business. He has always been a proponent of fundamental analysis and basing his investment decisions on what he thinks of the company, instead of trusting media pundits, chart patterns or other technical indicators.
Plenty of investors rely entirely on technical analysis. To them, they’re simply buying and selling ticker symbols that rise and fall. While investors occasionally have a string of good luck this way, for the most part, you’ll find that the ones who espouse this approach do so because they want to sell you their “one-of-a-kind” stock picking system.
Buffett’s approach is smart in its simplicity. If you consistently choose to invest in good companies, those companies will be successful more often than not, which means your investments will also be successful.
Avoid Borrowing to Make Your Investments
There are a couple ways for an investor to buy stocks using borrowed money. They could obviously just borrow cash to fund their investing, or they could make investments on margin. Regardless of the way the money is borrowed, Buffett advises against it. His reasoning is that if you’ve borrowed any money for your investing, you could get nervous more easily should your holdings take a hit, and those nerves can cause poor investing decisions. Investing is emotional enough as it is.
Buffett used Berkshire Hathaway’s stock as an example here to show what kind of drops can occur, even with successful companies. A chart that dated back to 1973 showed the company had gone through four significant down periods, with the worst being when it lost 59.1 percent of its value starting in 1973 and continuing until 1975.
Berkshire Hathaway has, of course, recovered from all those drops, but Buffett’s point is that any company can suffer a loss, and you never know how bad a loss is going to be. If you’ve borrowed money to invest in a company and it has a big drop, you could do something foolish.
Buffett’s letter is full of useful information, including investing tips and his thoughts on the current market, making it well worth the read. The three tips above are simply the key points that any investor could use to more effectively build long-term wealth. It’s extremely rare for anyone to get rich quick from investing, but by following Buffett’s advice, you can earn a stable, consistent return on your money.
