For as long as I can remember, the investment maxim that most evokes a mix of adulation and performance anxiety is “Invest like Warren Buffett.”
How can mere mortals emulate a deity? In truth, most of us will never come close to “the oracle of Omaha.” He’s done all the things a stellar investor should do: He buys when there’s blood in the street, finds solid companies at great prices, and keeps them forever. Lacking Buffett’s phenomenal verve and mettle, though, most of us won’t do this. But that doesn’t mean we’re doomed.
Fortunately, the multibillionaire chairman of Berkshire Hathaway Inc. has been generous with his wisdom, and two recent books compile and analyze it elegantly: “Tap Dancing to Work,” by Carol Loomis, a longtime Fortune writer and Buffett friend, and “Think, Act and Invest Like Warren Buffet,” by Larry Swedroe, director of research for Buckingham Asset Management. What key advice resonates most?
■ Stick with index funds. You probably won’t get the returns of Berkshire Hathaway, but you can get pretty close to market returns.
If individuals “aren’t going to be an active investor — and very few should try to do that — then they should just stay with index funds. Any low-cost index fund,” Loomis quotes Buffett as advising. “And they should buy it over time. They’re not going to pick the right place and time.”
■ Don’t play Buffett’s game. Although Buffett is often able to time his purchases brilliantly, chances are you won’t. Research shows that most individual investors’ records on timing the market are dismal.
Acknowledge you won’t be able to predict the market. If you take Buffet’s advice on index funds and stay the course, “the only way an investor can get killed is by high fees or by trying to outsmart the market,” he said in 2008.
When you find good stocks, buy them at low prices and hold them. For those buying individual stocks, this means dollar-cost averaging — fixed investments every month — and reinvesting the dividends. Most large companies offer dividend reinvestment plans.
Swedroe reinforces Buffett’s advice by citing academic studies that actively managed mutual funds show “no evidence of the ability to persistently generate outperformance beyond what would be randomly expected.” So a passive strategy can work for most investors.
Most individuals also get scorched on transactions and trading costs. You can inexpensively own most of the stock and bond market through two funds: The Vanguard Total Stock Market Index ETF and the Vanguard Total Bond Market Index fund. The company charges you 0.06 percent and 0.22 percent annually, respectively, for managing those funds.
■ Think long term. Buy durable enterprises that will produce profits for decades, not quarters. Buffett has bought into enterprises like BNSF Railway Co. and Coca-Cola. They have good prospects, but not because of recent “rear-view” quarterly earnings. When Buffett says he’s buying “businesses,” he’s committed to managements that generate cash, profits, and dividends decades into the future.
■ Keep your cool, be a contrarian. Booms and busts don’t seem to faze Buffett, who will hold onto his cash when most are buying and open his wallet when the market crashes. He’s not distracted by television blowhards or prevailing sentiment — emotions that can derail even the smartest and investors. He knows how to seize opportunities when most investors are seized by fear.