Berkshire Hathaway CEO and genius investor Warren Buffett’s Annual Letter to Shareholders offers some of the best, most essential lessons in investing we’ve found in our quest to get our financial health in order (money being an important fuel for our creative well-being). The wisdom and analysis Buffett imparts is like gold; clearly written, easily understandable and rich with useful principles and information. We look forward to reading it every year.
The 2017 Annual Letter in particular offers timely counsel for the ordinary investor in our unsettling economic times.
Our favorite chunk is about the bet Buffett made ten years ago that the low-cost S&P 500 index fund would beat five high-fee investment experts. (They, in turn, employed several hundred other investment experts, each managing his or her own hedge fund to make up five funds-of-funds.)
After ten years, the plain vanilla index fund with interest compounded (yielding 125.8%) significantly beat ALL the funds (yielding from 87.8% highest to 21.7% lowest).
Buffet points out three essential lessons that the bet illuminates:
—Performance comes, performance goes. Fees never falter.
Although the hedge fund managers prospered (because they took their fees whether they did well or not), many of their investors experienced a lost decade.
—Stick with big, “easy” decisions and eschew activity.
Although the hedge fund managers made thousands of buy and sell decisions based on intensive research, none came close to the one-step, buy-and-hold strategy of investing in an S&P 500 Index Fund.
—Though markets are generally rational, they occasionally do crazy things. Seizing the opportunities then offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.
Keeping your head and sticking with the single, simple index fund over the decade would have yielded 8.5% a year, without doing anything or paying high fees. The fancy funds-of-funds yielded only from 2% to 6.5%.
If you just looked at short-term returns, you would do what most people do and panic, selling out and losing value, or trying to game the market, which is difficult to do…Holding the course and taking a longer view tends to yield hard-to-beat results. Writes Buffett:
Berkshire, itself, provides some vivid examples of how price randomness in the short term can obscure longterm growth in value. For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares have suffered four truly major dips,
Buffett sums up his philosophy in the face of the harsh reality of uncertain times:
The next 53 years our shares (and others) will experience declines…No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow. When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:
“If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you…
Yours is the Earth and everything that’s in it.”
You can read every Berkshire Hathaway Annual Report going back to 1977 here.
Read Rudyard Kipling’s “If” in its entirety here.
2 replies on “Warren Buffett’s 10-Year Bet Yields Essential Lessons in Investing In Unsettling Times”
i believe in investing my time, AND MONEY,
and my thoughts, and my curiositys,
….and most importantly:
Warren ‘may’ have a million bucks,..somewhere;
but i saw a stork today(!),
wrote two new lines for a poem(!,..!),
and got a splinter sanding my kitchen table.
I say: “Invest in yourself.”
,…and have the empty bank-account to prove it!
You are a very wealthy man!