How Can I Get World-Class Investing Advice for Free?

Answer:  Read Warren Buffett’s 40+ page annual letter which just came out this weekend.  This year’s letter is a real treat since Warren and his parter, Charlie Munger, celebrate their 50 year partnership with a retrospective look on lessons learned.  Given his focus on creating value for his shareholders, Warren starts each letter with a chart showing how the value of Berkshire Hathaway has grown over time.

Want a compound interest problem to grab student’s attention?  Have your students calculate what $100 invested in his company in 1965 would be worth today.  Looking at the column titled “Per Share Market Value of Berkshire”, you can see that his compounded annual gain from 1965-2014 is 21.6% compared to the S&P500 return of 9.9%.  Plug that into a compound interest calculator and that $100 invested with Buffett in 1965 turns into almost $1.8 million by the end of 2014.  Wow!!!

I found this nugget buried in his letter to be extremely useful advice for investors (you might encourage your students to start reading on page 24 as this is where Warren’s commentary about his investment philosophy begins):

Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.

The commission of the investment sins listed above is not limited to “the little guy.” Huge institutional investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits tight for decades. A major reason has been fees: Many institutions pay substantial sums to consultants who, in turn, recommend high-fee managers. And that is a fool’s game.

There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing.

Note the key points:

  • Bad investing practices:  active trading, timing the market, not diversifying, high fees and high leverage (borrowing to invest in the market).
  • Folly of market forecasts
  • Hard to figure out who is a good investment manager in the short-term.  Is it luck or skill?
  • Watch out for the sales pitch!