Lessons from Warren Buffett

Warren Buffett just released the 2017 Berkshire Hathaway shareholder letter, an annual missive that is part performance review and part market wisdom, often offered with a healthy dose of humor and a few jabs at the financial services industry. (One of my favorites: “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”)

So what can ordinary investors learn from the 87 year-old Oracle of Omaha? Here are some of the pearls that Buffett offered in this year’s letter:

  • “It is insane to risk what you have and need in order to obtain what you don’t need.”
  • “Though markets are generally rational, they occasionally do crazy things.”
  • “Stick with big, ‘easy’ decisions and eschew activity.”

I combed through other Buffett quotes, all of which are great lessons for investors.

It is not necessary to do extraordinary things to get extraordinary results.” In 2013, Buffett advised the trustees of his estate to “Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund…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.”

Buffett has long held that investors are better off with low-cost index funds than paying higher fees to managers, especially hedge fund managers. At the end of last year, Buffett claimed victory over Ted Seides from asset manager Protégé Partners in “The Million-Dollar Bet”. That was the 2007 wager where Buffett challenged any active manager to beat the S&P 500 with a portfolio of hedge funds. Buffett didn’t just win—he killed it. The average annual gain for the index fund over ten years was 8.5 percent. The five funds of hedge funds selected by asset manager Protégé Partners reported average annual gains between 0.3% and 6.5%. One of the funds was liquidated last year.

Over the long term, the stock market news will be good.” In October 2008, amid the worst financial crisis in a generation, Buffett wrote an op-ed in the New York Times, urging investors to maintain the faith. He underscored an important point: “I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.”

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.” There are some who question why Berkshire is sitting atop $100 billion in cash right now – I think this quote can provide insight. Buffett is the consummate patient investor—it’s been more than two years since his last major purchase, $32 billion for Precision Castparts. Just because you have a pile of cash does not mean that you should blow it for the sake of doing something.

Happy America Saves Week! Monday, February 26th marks the start of a campaign managed by the nonprofit Consumer Federation of America, which aims to motivate and encourage Americans to save money, reduce debt, and build wealth. That’s a lofty goal, given that the personal savings rate fell to 2.4 percent in December, the lowest level since 2005 and the third lowest on record. Maybe economists are heartened by the idea that people are confident enough to spend, not save, but CFPs like me tend to pine for the highest post-recession reading of 11 percent, recorded in December 2012.