If you’re investing in stockmarket assets of any sort, here are four tips from Warren Buffett on long term investing
As Investing Has Been Around Since The Dawn Of Time, It Often Pays To Go Back To Basics
As one of the world’s richest men, chances are we could all learn a few investing tricks from Warren Buffett. Here are his top four investing tips.
1. Own Low-Cost Index Tracker Funds
Owning index tracker funds has been the backbone of Warren Buffett’s investing career.
He says: “Don’t try to pick winning stocks. Instead own a cross section of businesses that in aggregate are bound to do well. In the 20th century, the Dow Jones industrial average advanced significantly, paying a rising stream of dividends to boot. The 21st century will witness further gains, almost certain to be substantial.”
On his death, his trustee will be instructed to invest the cash allocated to wife in two ways:
- 10% in short-term government bonds
- 90% in a very low-cost S&P index fund
He suggests Vanguard’s index fund saying: “I believe the trust’s long-term results from this policy will be superior to those attained by most investors who employ high-fee managers.”
2. Focus On Productivity Of Assets
When investing for the long term, Warren focuses primarily on the future productivity of the assets. He always ignores what the economy, interest rates, or the stockmarket might do in the coming years.
For any investment, he believes it’s key to understand the productivity of particular assets rather than analysing whether the price of farmland or real estate now or in five years would go up. He says: “If you focus on the prospective price change of a contemplated purchase, you are speculating.”
3. Ignore The Macro Environment And Political Environment
When he and his business partner Charlie Munger buy stocks, they think of them as “small portion of businesses” and try to see the earnings power of these businesses over the next five years or more. He says: “In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment.”
When questioned about real estate prices or stock prices during the Great Recession he said: “Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?”
4. Make As Few Investments As Possible
Investors these days are pushed to be active and to buy low, sell high. He says: “Slow it down.”
“Frequent buying and selling only cuts into long-term returns. Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. Ignore the chatter, keep your costs minimal, and invest in stocks as you would a farm.”
Further proof of Warren Buffett’s large scale investing can be seen in this article entitled Compound Interest Explained: Charges.
Here’s A Lovely Illustration Of Investing At Its Simplest
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