What I’ve Noticed About Warren Buffett’s Advice…
By Malcolm Wheatley - Thursday, 19 June, 2014
Many people — me included — have prospered through listening to the sage advice of Warren Buffett. Buffett, in short, is not only one of the world’s very richest individuals, but arguably he’s the most successful investor ever, too.
And his annual letters to the shareholders of his Berkshire Hathaway investment vehicle — where much of his advice is dispensed — have become famous, and are quite rightly very widely quoted.
But let me share with you something that I’ve noticed about some of Buffett’s advice.
The real nuggets of wisdom are sometimes not contained in the words that make up his best-known quotes.
Let me give you an example.
“Our favourite holding period is forever,” is a Buffett quote you’ve doubtless heard, taken from Berkshire Hathaway’s annual letter to shareholders in 1988.
And yes, he did indeed write these words, which are often used to endorse Buffett’s slow-and-steady ‘long-term buy and hold’ approach to investing.
Which is certainly an approach that’s paid dividends for him — literally. His annual dividends from his multi-decade stake in Coca-Cola, for instance, now exceed what he paid for the shares all those years ago back in the 1980s.
But that isn’t to say that Buffett is mindlessly dogmatic about a policy of long-term buy and hold, or that he advocates it in all circumstances.
For the full wording of the quote is very clear:
“When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.“
Which is a rather different kettle of fish, as I think you’ll agree.
And given that he’s recently sold some of his stake in Tesco, Buffett has perhaps come to the conclusion that Tesco is not an outstanding business with an outstanding management.
Slow and steady
Today, I’d like to draw your attention to the full wording of another one of Buffett’s most widely cited remarks.
Again, it’s from a letter to shareholders, this time the 2004 letter.
And from that clue alone, astute Buffett-watchers can probably tell that — yes! — that it’s Buffett advising investors that “they should try to be fearful when others are greedy, and greedy only when others are fearful.“
Sage words, too. But to my mind, it’s a shame that the preceding sentence of Buffett’s advice is often overlooked. For here’s the full quote:
“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy, and greedy only when others are fearful.“
In other words, he’s once again advocating that same slow-and-steady approach to investing. Forget supposedly ‘sure fire’ exciting trading strategies; forget hopping between asset classes following the latest fad; focus instead on keeping costs down — and staying invested in decent businesses making decent returns.
And the good news is that today it’s easier than ever to pursue that strategy, and put it into practice.
How? Read on.
Today’s low-cost ‘execution only’ online brokerages are an enormous advance on the fusty old stockbrokers of yesteryear, who charged exorbitant fees for being on the other end of a phone when they weren’t on the golf course.
Today, my low-cost broker has regular ‘dealing days’ when it’s possible to buy shares for just £2 plus stamp duty. At other times, I’m charged £11.95 — a figure that’s about average.
Yet looking at an old contract note from 1992, I see that back then a traditional broker charged me a so-called ‘minimum commission’ of £31 for executing a £975 trade in Marks & Spencer shares. That’s easily the equivalent of £60-plus now, allowing for inflation.
Britain’s favourite low-cost tax-efficient investment wrapper is another boon for the investor intent on avoiding excitement and keeping costs down.
Individual Savings Accounts (ISAs) are now hugely popular, and with the higher annual allowances that have been announced in recent Budgets, it’s possible to build up serious personal wealth inside them.
There are, indeed, a number of ISA millionaires out there — people who through canny investing, have built up million-pound portfolios entirely inside an ISA. Which is pretty good going, considering the low annual allowances that used to apply to such accounts.
Self-Invested Personal Pensions (SIPPs) are another low-cost tax-efficient investment wrapper, this time intended as a savings vehicle for pension money.
Simply put, SIPPs allow people to build a retirement pot, free from capital gains tax or income tax — and get the benefit of tax relief on their contributions.
Not so long ago, some people were leery of locking up their wealth inside a pension, preferring the freedom of being able to access their retirement savings at will by using ISAs or fund supermarkets.
But today, that’s no longer a concern — again, thanks to rule changes, this time in the Chancellor’s most recent Budget.
So there we have it — low-cost share dealing, coupled to low-cost investment wrappers. Warren Buffett would certainly approve.
Malcolm owns shares in Tesco and Marks & Spencer. The Motley Fool owns shares in Tesco.
Many people — me included — have prospered through listening to the sage advice of Warren Buffett. Buffett, in short, is not only one of the world’s very richest individuals, but arguably he’s the most successful investor ever, too. And his annual letters to the shareholders of his Berkshire Hathaway investment vehicle — where much of his advice is dispensed — have become famous, and are quite rightly very widely quoted. But let me share with you something that I’ve noticed about some of Buffett’s advice. The real nuggets of wisdom are sometimes not contained in…