6 Investing Lessons from Warren Buffett

This year, Warren Buffett celebrates his 50th anniversary at the helm of Berkshire Hathaway (BRK.A) (BRK.B). When he took charge of the company, Berkshire was a declining textile manufacturer operating at a loss and closing plants. Today, it’s a huge conglomerate that owns and operates numerous successful businesses, including the insurance companies that provide it with the huge pool of cash that Buffett and his team use to acquire new businesses and invest in the stock market. Berkshire Hathaway has grown over 20% a year, on average, over the past 50 years–a return that’s roughly twice that of the S&P 500 over the same period.

Buffett has plenty to celebrate, but in this year’s letter to shareholders, he spends almost as much time reflecting on his mistakes as he does his successes. Buffett not only writes about the past year’s results, but looks back on his whole 50-year journey–and looks ahead to the future, including what the firm will do when he’s gone.

He’s learned a lot in the past 50 years, as you might imagine, and he has plenty of advice for individual investors. Here are six lessons individual investors can learn from Buffett’s Golden Anniversary reflections:
 

1. It’s your behavior that makes investing risky, not volatility.

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Volatility shouldn’t matter if you’re investing for the long haul, Buffett points out. The real problem is, if you’re spooked by volatility, you may end up doing something really risky–like trying to time the market. It’s investor behavior–actively trading, failing to diversify, and paying excessive fees–that makes owning stocks risky, Buffett says.
 

2. Be wary of salespeople.

“Don’t ask the barber whether you need a haircut,” Buffett writes. Consider the business model of anyone who’s giving you advice–do they make more money when you take action as opposed to sitting tight in an index fund? Buffett also notes that most advisors “are far better at generating high fees than they are at generating high returns.” They’re really salespeople, he says. SigFig research supports this: advisors generally don’t justify their fees by outperforming individuals who manage their own accounts.
 

3. Face your mistakes.

Buffett owns up to quite a few mistakes in this letter–starting with building up a large stake in Berkshire Hathaway in the ‘60s, which he essentially says he did out of spite. He mentions businesses he shouldn’t have acquired, and opportunities he missed. He also says he should have sold out of Tesco (TESO) sooner than he did (although he notes that they’ve now hired new management). That serves as a lesson for investors who tend to hold onto the losers in their portfolios too long, to avoid the pain of taking the loss. Take Buffett as your role model and learn to own up to your mistakes, take your hits, and move on.
 

4. Beware overpriced investments.

Buffett returns to this point a few times in his letter. It’s one of his core principles when looking for businesses to acquire: even a good business is a bad investment if you pay too much for it. This absolutely applies to individuals buying common stock. As Buffett writes of Berkshire Hathaway’s own stock, “a sound investment can morph into a rash speculation if it is bought at an elevated price.” This point is worth remembering–particularly when you’re considering buying shares in a hot new IPO. Individual investors tend to pay a premium for newly public shares, which cuts into any potential returns.
 

5. What happens to a stock in a single year often says more about the market than the stock.

As Buffett’s own investing mentor, Ben Graham, famously said, “In the short term, the market is a voting machine; in the long run it acts as a weighing machine.” In other words, in the long term, stronger businesses will ultimately be worth more–but in the short term, anything can happen. Nobody knows what any stock will be worth a year from now, but you can be reasonably confident that investing in a solid business will reward you in the long run–unless you’ve overpaid for that stock in the first place.
 

6. Don’t expect another 50 years like the last 50.

Buffett is very confident that Berkshire will continue to be well-managed and the value of the business will continue to grow. However, he says investors still shouldn’t expect the kind of percentage gains from Berkshire in the next 50 years that it’s enjoyed over the last 50. “The numbers have become too big,” he says. A business of Berkshire’s size simply can’t continue gaining 20% a year.

It’s obviously been a great 50 years for Buffett, as well as for Berkshire Hathaway investors. The stock has gained a staggering total of 1,826,163% from 1964 to 2014. Even if such returns are a thing of the past, Buffett still has plenty to offer investors: his timeless, sensible, down-to-earth advice.
 

Note: All data in the images used in this article was aggregated and anonymized from investors who have synced their investment accounts on SigFig. Minimum sample size in each analysis is 250,000 investors. Technical details are available upon request.
Sarah Morgan is a freelance writer and editor based in Brooklyn. Her work has appeared on SmartMoney.com and in the Wall Street Journal.

Should Investors React to the Fed’s Interest Rate Statements?

Federal_Reserve_Shutterstock Fed-watching is an arcane and complicated sport whose rules can be difficult for newcomers to understand. It’s a lot like cricket in that way… if cricket matches had the ability to send stocks soaring or plummeting. Thanks in part to last week’s Fed statement, the S&P 500 gained almost 3% for the week, with a sharp spike on Wednesday afternoon, when the statement came out.

So what did the Fed say? Not much, but it’s also relevant what they didn’t say. In January, the Fed stated that it could “be patient in beginning to normalize the stance of monetary policy.” This month, they didn’t reiterate that potential patience while describing the state of the economy in less enthusiastic tones, saying that “economic growth has moderated somewhat”; in January, it was “expanding at a solid pace”.

To Fed-watchers, this suggests that the Fed is still slowly preparing the market for the possibility that it will raise interest rates in the relatively near future. With the economic recovery slowing, however, they may not make this change as soon as they otherwise might. Analysts who had predicted the first interest rate hike to come in June are now predicting September. Many see that as good news for the stock market, for a variety of reasons. Extremely low interest rates tend to push savers into riskier assets in search of better returns, and that buying pressure increases asset prices. Additionally, low interest rates tend to increase consumer spending, translating into higher corporate earnings, which in turn produce higher valuations.

Does that mean that individual investors should be rushing to prepare their portfolios for higher interest rates in September? Not exactly, says Doug Roberts, the chief investment strategist for Channel Capital Research. “I’d say, stick with your existing allocation,” Roberts says, assuming this existing allocation is appropriate for your risk tolerance, investment horizon, and investment goals.

The Fed will eventually raise rates, and it will most likely start this year, Roberts says, but when it comes, the increase is likely to be very gradual: perhaps as little as 0.12% at a time. The Fed is moving “at the speed that moss grows on trees,” Roberts says. They won’t want to raise rates too quickly, because the economic outlook is still somewhat uncertain. “The data is precarious. Things could change relatively quickly,” he says.

In the short term, as traders try to predict the Fed’s next move, there’s likely to be quite a lot of volatility, particularly over the summer, when trading volumes are usually lower anyway, Roberts says. “At this point, you have to have a financial plan out there that you’re committed to, and you have to be able to tune out the volatility and the noise,” he says. As long as you have a plan, “stick with your existing allocation,” he says. And if you don’t have a plan, make one now, before volatility increases and makes it much harder to make careful choices, he says.

In the longer term, interest rates are likely to rise. When interest rates rise, bond prices will fall, because there will be new bonds available with higher yields. “We think that rates probably move up in the next five years. Not significantly, but even if they move up a little bit, that’s not great for bond returns,” says Karl Mills, the president of Jurika, Mills & Keifer.

Investors looking for diversification that will yield a decent return could consider looking to international stocks, Mills says. He says that European stocks are attractive right now for several reasons, including a weaker euro, which benefits the continent’s exporting companies, and the lower price of oil, which lowers their costs. The low price of oil is also good for other countries that are net importers of commodities, like India, Mills says. In the past couple of years, global markets have largely been driven by news from the U.S., so diversification hasn’t been as effective as it usually would be, he says, but he expects international markets to diverge more from the U.S. in the near future.

The key is not to let short-term volatility spook you. Individual investors lose money when they try to time the market, and trying to time the Fed is no different. Make a plan that you feel comfortable sticking with for at least the next several years, and stick with that, no matter how patient or impatient the Fed seems to be.

Image: Shutterstock.
Sarah Morgan is a freelance writer and editor based in Brooklyn. Her work has appeared on SmartMoney.com and in the Wall Street Journal.

Friday Notes: Passive vs active fund performance, vetting your financial advisor and common investor mistakes

1. Jeff Sommer of the New York Times shares recent research on actively managed funds:

The truth is that very few professional investors have actually managed to outperform the rising market consistently over those years… In fact, based on the updated findings and definitions of a particular study, it appears that no mutual fund managers have.

2. In our own data, we have also found that a low expense ratio is a predictor of a fund’s returns. In the most recent year (12 months ending 3/8/2015), passive index funds owned by the typical everyday investor had 1.4-times higher net returns than actively managed funds (10.1% vs 7.1%), while charging almost five times less (15 vs 73 bps median expense ratios)*. In fact, across a long period of time, according to broad research, having low fees seems to be one of the most reliable predictors of fund performance.

3. If you are considering a financial adviser, the New York Times has a good set of questions you should be asking before hiring her.

At the center of this argument is a surprising fact. The traditional financial services industry doesn’t follow a uniform standard of care. When you visit a bank, an insurance broker, a credit union or an independent adviser, the way you get financial advice varies.

4. Investing social network openfolio.com has shared some interesting findings on common investing mistakes.

5. We recently compiled a similar report. Read about it on Bankrate or ValueWalk, or download the report here.

FundFees-Advisors

* Data note: This is from analysis of 800 funds owned by investors who synced their portfolios on SigFig. It represents $44 billion in synced assets, across more than 250,000 households. Past performance is no guarantee of future returns.

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The Editors
Aleks Todorova

Aleks Todorova

Editorial Director

Aleks runs content at SigFig. Before joining the company, she ran the editorial teams at Visually and Mint.com. Her work has appeared on SmartMoney.com and the Wall Street Journal, among others. At lunchtime and on weekends, you'll find her swimming, biking or running -- or all three, in that order.
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Benny Wijatno

Data Science and Analytics

Benny does all things data and science at SigFig. He was Director of Product Analytics at TinyCo and a Principal at Applied Predictive Technologies, where he helped companies run smarter experiments. He studied Economics at Harvard, is an avid cook, and loves running.