This is an excerpt from a WSJ Market Watch story on Buffets recent advise to average investors.
Five lessons for the average investor:
- You don’t have to be an expert to achieve satisfactory investment returns. Recognize your limitations, keep things simple and “don’t swing for the fences.” Don’t believe in or look for a quick profit.
- Focus on the future productivity of the assets you are considering. Unless you can make a rough estimate of its future earnings, move on. You can’t evaluate everything, but you have to understand the actions you’re going take.
- Avoid speculation, such as focusing on the prospective price change of an asset. “Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game,” says the Sage.
- Think about what that asset will produce, not about daily valuations. “Games are won by players who focus on the playing field — not by those whose eyes to the scoreboard,” says Buffett.
- “Forming macro opinions or listening to the macro or market predictions of others is a waste of time” and even “dangerous, because it may blur your vision of the facts that are truly important,” he says.
How does Buffett buy stocks? He looks at whether he can sensibly estimate an earnings range for five years out or more. If the answer is yes, he’ll buy it if he can get it at a reasonable price in relation to the bottom boundary of his estimate. If he can’t estimate future earnings, he moves on.
“In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions,” he says.
And nonprofessional investors? The good news is that they don’t need to know how to predict future-earnings power, as American businesses have done well over time and will keep headed in that direction, he predicts. The nonprofessional should not be trying to pick “winners” all the time, but “own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”
His final bit of advice for the nonprofessional? Accumulate shares over a long period, and never sell when the news is bad and stocks are well off their highs.
The full article can be found:
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