Friday, March 5, 2010

Buffett Bites

I have followed Warren Buffett since college when I took my first real investments class. He has been revered by many, but also accused by many as being old fashioned and past his prime. However, as the accusations keep coming the one constant is that his company Berkshire Hathaway has continued to outperform most other inhabitants of this earth. He has consistently outperformed the competition all while sticking to a few simple and honorable principles. It is funny when I look back at my blog and see how many times I have mentioned his name and the many more times I have cited advice which parallels the Buffett maxims because I actually spend very little time managing my investments. But I guess the lack of time I put into investments is symbolic of the approach that I take. If you don't have the time to dedicate to extensive research then you are probably better off just investing in index funds, investing for the long haul, and gladly taking the gains that the broad market enjoys over time. This is a classic Buffett nugget of advice for passive investors worldwide and it is one I have heeded. Here are a few other Buffett bites of wisdom from the MSN Money homepage:

Stay liquid. "We will never become dependent on the kindness of strangers," he wrote. "We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses."

Buy when everyone else is selling. "We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend. . . . Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."

Don't buy when everyone else is buying. "Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance," Buffett wrote. The obvious corollary is to be patient. You can only buy when everyone else is selling if you have held your fire when everyone was buying.

Value, value, value. "In the end, what counts in investing is what you pay for a business -- through the purchase of a small piece of it in the stock market -- and what that business earns in the succeeding decade or two."

Don't get suckered by big growth stories. Buffett reminded investors that he and Berkshire Vice Chairman Charlie Munger "avoid businesses whose futures we can't evaluate, no matter how exciting their products may be."

Diversify your portfolio. Most investors who bet on the auto industry in 1910, planes in 1930 or TV makers in 1950 ended up losing their shirts, even though the products really did change the world. "Dramatic growth" doesn't always lead to high profit margins and returns on capital. China, anyone?

Understand what you own. "Investors who buy and sell based upon media or analyst commentary are not for us," Buffett wrote.
"We want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it's one that follows policies with which they concur."

Defense beats offense. "Though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the 11 years during which it delivered negative results. In other words, our defense has been better than our offense, and that's likely to continue."

Timely advice from Buffett for turbulent times.

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