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1/3/2017

4 Comments

Advice From The World’s Best Investor: Relax And Avoid Fees

 
The release of "The Oracle of Omaha's" famed annual letter to shareholders of Berkeshire Hathaway  is a closely watched event. Any why not? Warren Buffett, who at 86 remains just about unbeatable as a long-term investor,  had two big messages for investors in his annual shareholders’ letter.
​The letter is studied by investors around the world for hints on how to replicate Buffett's long-term returns.

Last year was no different; shares in Berkshire Hathaway – which owns household-name US businesses including insurer Geico and railroad company BNSF, as well as big chunks of Apple, Coca-Cola, Kraft Heinz, Delta Airlines among others – finished 2016 up 23.4 percent for the year.
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In his letter for 2016, released at the weekend, Buffett returned to two of his favourite themes: don’t fear downturns, but beware out-size fees.

Buffett, who has made an estimated fortune of $74 billion in his 52 years as a largely buy-and-hold investor, advised investors to stay calm in the face of market downturns.

“The years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks …During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted,” he wrote.

“Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”

If you identified well-priced investment opportunities as others lost their heads in times of panic, Buffett advised acting fast. Buffett said he and Berkshire Hathaway vice-chairman, 93-year-old Charlie Munger, believed dark clouds often rained gold.

“When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons,” he wrote.

Buffett continued the theme of “high and unnecessary costs” at length; he has long argued that active fund managers in aggregate would underperform amateurs who bought and held, if measured over a period of years.

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” he cautioned. “Both large and small investors should stick with low-cost index funds.”

Short-term success by a fund manager did not necessarily mean continued success over the long term, Buffett wrote, offering an telling example.

“If 1,000 managers make a market prediction at the beginning of a year, it’s very likely that the calls of at least one will be correct for nine consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet,” he wrote.
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“But there would remain a difference: The lucky monkey would not find people standing in line to invest with him.”
4 Comments
Ben
29/3/2017 08:02:37 pm

Hey Tony, thought your readers might be interested in this. For the first time in the company’s history, Berkshire Hathaway live-streamed its annual shareholder meeting for all of the world to see. Investors and non-investors alike were able to watch live, as Chairman and CEO Warren Buffett and his right-hand man Charlie Munger shared their unscripted views on the company, the markets, the economy, corporate governance and even happiness.You can view the shareholders meeting here.

https://finance.yahoo.com/brklivestream

Enjoy the replay.

Reply
Tony
30/3/2017 05:22:34 pm

What a brilliant share Ben, I wasn't aware. Thanks for contribution, much appreciated.

Reply
MA via LI
29/3/2017 08:26:54 pm

There will always be a place for active management, I believe. Still, when you look at the #SPIVA numbers, your post, Tony Sandercock CFP®, is totally congruent. Long term, the ability to be both in, and OUT, is what can give you a profitable edge. Comments, Gary Stone ?

Reply
GS via LI
29/3/2017 08:28:35 pm

Marc, in my research and experience it comes down to agility and the ability for the fund or investor to go 100% into cash at times.

Small boutique funds and individual investors can do this but large funds can't so they have to invest and continually rebalance into other less optimal risk management strategies such as diversification across worse long term performing asset classes.

And that's why over the long term passive investing in index investing beats active fund managers.

But agile active individual investors can beat passive index ETFs (and hence beat the market benchmarks and active fund managers) by doing less than a handful of trades a year trading the index (via an index ETF).

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