Take It from Warren

By Brian Dolan, Head Market Strategist

Buffett on Investing

This past weekend, Warren Buffett released his annual letter to shareholders. Investors worldwide regularly pore over his words looking for life-changing investing advice. Year-in and year-out, he never disappoints. But his observations on investing rarely change much from year to year—sentiments expressed in his 1994 shareholder letter could easily be echoed in his 2014 musings. That’s because, at the heart of it, his investing philosophy is simple and unwavering.

What would Warren do?

We get many questions from investors, new and old alike, asking “what’s the best way to invest?” To answer that question, I’ll turn to a few pearls of wisdom from Warren Buffett. At an annual shareholders’ meeting, Warren was once asked, “If you had a million dollars to invest today, what would you do with it?” He didn’t hesitate for a second and responded along the lines of ‘I’d put it in a broad-based, low-cost index fund of US stocks and leave it there. Not all at once, of course, but over time.’

Simple is as Simple Does

Couldn’t be simpler, right? Let’s take a closer look at what he’s really advocating.

  • Investing in American Stocks--The heart of his approach is to invest in the US stock market for the long haul. He has an unshakeable faith in the inevitability of success of the American market economy over time. History has shown that faith to be well-placed.
  • Broad-based, index funds—His investing vehicle of choice is a diversified index fund to capture the broad gains expected from stocks over time. No need to wrack your brain trying to pick individual stocks; just invest in the market as a whole. ETFs are an efficient way to invest in broad-based indexes.
  • Low-cost—Buffet understands that expenses can seriously erode investing returns, especially over the long run. He’s always stressed minimizing investing expenses and limiting portfolio turnover (repeated buying and selling). Or, as Buffet said, channeling Sir Isaac Newton and his laws of motion, “For investors as a whole, returns decrease as motion increases."
  • Long run—Just ‘leaving it there’ is the essence of long-term investing. And it’s more easily done than trying to actively manage a portfolio through market ups and downs, and with lower costs. It also embraces the power of compounding, which takes time. Or in Buffett’s own words: "Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant."
  • Not all at once—Buffett understands that humans are bad at trying to ‘time the market’ (buy lows/sell highs). The process of Dollar Cost Averaging is one investing strategy that enables the accumulation of a portfolio over time, potentially taking advantage of near-term market setbacks.

So if you’re wondering how, when and where to invest, take it from Warren.

Photograph by Mark Hirschey (Work of Mark Hirschey) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons