06 Nov Warren Buffett’s Yearly Wisdom
Warren Buffett has released his annual newsletter and like every year it has some important reminders on how easy investing can be – if you keep it simple.
Buffett uses real estate investments he’s made to draw a link to pointlessly worrying about fluctuating share prices.
After a bubble in Midwest US farmland popped in the mid 80’s, Buffett purchased a 400 acre farm for $280,000 cash – less than the debt a failed bank previously lent against the farm.
Buffett purchased after calculating the operating expenses with his son, they figured the return to the farm would be 10%.
His focus was on the productivity of the asset, he never expected any grand returns and nor did he focus on a future sale price.
As he noted, “if you instead focus on the prospective price change of a contemplated purchase, you are speculating.”
Drawing a link to shares, Buffett pointed out although he wasn’t interested in the daily valuation of his farm, he found investing in shares offered an enormous advantage the farm didn’t, due to regular price updates.
For the investor who believed in what they already owned (and had cash available) a market downturn wasn’t a time to panic, but it presented an opportunity to increase holdings at a discount.
Yet most investors do the opposite – stress out or sell out, pushed on by pundits and commentators speculating on where the market and economy would go next.
Costs that occur from selling out and buying back in may seem fractional, but they greatly add up over time.
As Buffett points out, “individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions.”
His advice is simple – accumulate over a long period of time and never sell when news is bad or shares are off their highs.
A final reminder was the movement of the Dow Jones Industrial Index over the 20th Century – from 66 to 11,497 and despite many a downturn, an ever-increasing stream of dividends flowed.