Warren Buffett's annual letter to shareholders is almost always a treat to read, even if you don't own any shares of Berkshire Hathaway. It's eminently readable, and he usually throws in some evergreen personal advice that anyone can use. This year is no exception, based on an exclusive excerpt just published by Fortune.
In the letter, Buffett tells the story of two investments made more than two decades ago: a 400-acre farm outside Omaha and a commercial building in Manhattan. The farm is now worth more than five times what he paid. And he says the Manhattan investment produces annual income equal to more than a third of the initial investment.
His secret? He focused on the fundamentals of what the investments would produce, not on their fluctuating value. The real estate property, for instance, was adjacent to New York University, which he notes "wasn't going anywhere."
"Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard," writes Buffett. "If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays."
Buffett says that for "the nonprofessional" (that's the rest of us), there's no need to be picking winners in the stock market, or hiring someone else to do it either. And you should definitely ignore people on TV who try to predict broader market conditions.
A low-cost S&P 500 index fund, which captures a wide enough cross section of businesses, should be plenty. And he reveals that he's following his own advice in his will:
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I've laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife's benefit. (I have to use cash for individual bequests, because all of my Berkshire Hathaway shares will be fully distributed to certain philanthropic organizations over the 10 years following the closing of my estate.) My advice to the trustee could not be more simple: 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 suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.
So there you have it. You don't need much more than a Vanguard S&P 500 index fund.
It sounds like Buffett is a good candidate for a running feature by MarketWatch's Paul B. Farrell called "Lazy Portfolios" in which investors pick a handful of low-cost index funds, and Farrell tracks their performance over the years. David Swensen, the manager of Yale University's endowment, for instance, recommends just six index funds. There's also one from a second-grader who got some hints from his father and invested in only three funds.
The lesson from Buffett and others is that ordinary investing doesn't need to be complicated. In fact, if it's not simple, you're doing it wrong.
© 2014 Washington Post