The US investment maxim that most
evokes a mix of adulation and performance anxiety is: Invest like Warren
Buffett.
How can mere mortals emulate an
investing deity? In truth, most of us will never come close to "the Sage
of Omaha".
He's done all the things a stellar
investor should do. He buys when there's blood in the street, finds solid
companies at great prices and keeps them "forever". Lacking Buffett's
phenomenal verve and mettle, though, most of us won't do this. But that doesn't
mean we're doomed to failure.
Fortunately, the multibillionaire
chairman and chief executive of Berkshire Hathaway has been generous with his
wisdom and two recent books published in November compile and analyse it
elegantly: Tap Dancing to Work by Carol Loomis, a long-time Fortune writer and
Buffett friend, and Think, Act and Invest Like Warren Buffet by Larry Swedroe,
principal and director of research for Buckingham Asset Management.
What key advice resonates most?
1. Stick with index funds
Although you probably won't get the
returns of Berkshire Hathaway with index funds, you can still get pretty close
to market returns without having to be an oracle yourself.
If individuals "aren't going to
be an active investor - and very few should try to do that - then they should
just stay with index funds. Any low-cost index fund," Loomis quotes
Buffett as advising. "And they should buy it over time. They're not going
to pick the right place and time."
2. Don't play Buffett's game
Although Buffett is often able to
time his purchases brilliantly, chances are, you won't. In fact, research shows
that most individual investors' records on timing the market successfully are
dismal.
One of the most important Buffett
shibboleths is acknowledging that you won't be able to predict the market. If
you take his advice on index funds and stay the course, "the only way an
investor can get killed is by high fees or by trying to outsmart the
market", he said in 2008.
No big secret here. When you find
good stocks, buy them at low prices and hold them. For those buying individual
stocks, this means dollar-cost averaging - fixed investments every month - and
reinvesting the dividends. Most large companies offer dividend reinvestment
plans for this purpose.
Swedroe reinforces Buffett's advice
by citing academic studies that actively managed mutual funds show "no
evidence of the ability to persistently generate outperformance beyond what
would be randomly expected". So a passive strategy can work for most
investors.
Most individuals also get scorched
on transactions and trading costs.
3. Think long term
Buy durable enterprises that will
produce profits for decades, not quarters. Buffett has bought in to enterprises
like BNSF Railway and Coca-Cola that have been around for a long time and are
not going away. They have good prospects not because of recent
"rear-view" quarterly earnings reports. When Buffett says
he's buying "businesses," he's committed to managements that generate
cash, profits and dividends decades into the future.
4. Keep your cool and be a
contrarian.
Booms and busts don't seem to phase
Buffett, who will hold onto his cash when most are buying and open his wallet
when the market crashes. He's not distracted by television blowhards or
prevailing sentiment -emotions that can derail even the smartest and investors.
He knows how to seize opportunities when most investors are seized by fear.
When Goldman Sachs called him to
take a stake in the company at the height of the 2008 meltdown, Buffett got
some incredible terms on his US$5 billion ($5.9 billion) investment: A 10 per
cent annual dividend and repayment that eventually netted him US$1.7b when
Goldman paid him off early last year.
Who do you know can demand and
receive a legitimate 10 per cent dividend these days?
No comments:
Post a Comment