It’s written by one of the world’s richest men, it’s 24 pages long and it’s one of the best how-to guides that I can think of for young investors.
Hot off the presses, it’s the annual shareholders letter from Warren Buffett, the 83-year-old chairman of Berkshire Hathaway.
The Omaha financial guru’s annual letter is always one of the most anticipated reads by investment pros and financial pundits because of the insights it offers into Buffett’s stock picking strategies. But it’s also full of straightforward, sometimes folksy advice that would strike a chord with younger investors who are just learning the ways of Wall Street.
Buffett, whose net worth was recently listed at $58.2 billion by Forbes magazine, has made hugely successful investments for nearly 50 years in companies such as Coca-Cola, BNSF Railway, Geico, IBM, H.J. Heinz and American Express, to name just a few.
What can young investors learn from the Buffett way? Some themes from his latest letter to shareholders, which can be viewed atwww.berkshirehathaway.com
(along with letters from years past):
• Stick with quality names and brands.
Put it this way, said Buffett, “it’s better to have a partial interest in the Hope diamond than to own all of a rhinestone.”
• Buy and hold is often the best strategy.
Buffett used the example of two small real estate investments he made — a 400-acre Nebraska farm in 1986 and a New York City retail property in 1993 — to illustrate some investing fundamentals. He noted that he invested in the farm despite knowing next to nothing about farming. As for the retail property, one of the partners in his group was an experienced real estate investor who would manage the building.
Explained Buffett: “You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick ‘no.’
Which leads to another commandment from the Oracle of Omaha:
• Don’t be swayed by daily market fluctuations.
“With my two small (real estate) investments,” he said, “I thought only of what the properties would produce and cared not at all about their daily fluctuations. Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”
• Bearish stock markets present buying opportunities.
“Tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values,” Buffett said. “A climate of fear is your friend when investing; a euphoric world is your enemy.”
• Diversify and keep your trading costs low.
Buffett advises investors “to ignore the chatter, keep your costs minimal and invest in stocks as you would in a farm.”
To that end, he recommends investing in a low-cost mutual fund that tracks the performance of stocks in the Standard Poor’s 500 index. Said Buffett: “I believe the … 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.”
Make sense? If your young investor wants more Buffettisms, consider buying him or her Berkshire’s B stock, recently selling for about $118 a share.
The payoff is a seat at the “Woodstock for Capitalists,” Berkshire’s annual shareholders meeting May 3 in Omaha.