CNBC has made available for download their article “Warren Buffett: Guide to Investing,” which introduces three principles and other important tips that have contributed to Warren Buffett’s overall success as an investor. The article begins as follows:
For Warren Buffett, deciding what stocks to buy is “simple but not necessarily easy.”
He spends most of his day reading. He calls it his “secret.” Buffett reads hundreds of pages a week to build up “compound knowledge” over decades. He reads books, newspapers, and especially, annual reports. “The beauty of it is that the knowledge is cumulative… What you’re learning about Company A will help you thinking about Company B,” he said.
It’s a lot of work and it takes a lot of time. Buffett enjoys that work and has the time to do it. He is a professional investor. Most people aren’t professional investors. The advice he’s given, time and time again over the years, is that for most people, the best thing to do is make regular contributions to a low-cost stock index fund and spend your time on the other things you need, or want, to do.
He adds, “You will not get that advice from anybody else because nobody gets paid to give you that advice.”
And, he stresses, don’t take advice from anyone who is paid to offer it. “You will have all kinds of people telling you how much better they can do for you” if you pay them, “but they won’t do better.”
To prove his point, in 2007, he made a massive 10-year bet for charity with a proponent of active investing that a low-cost Vanguard S&P 500 index fund would outperform a hand-picked basket of hedge funds, which charge large fees.
At the end of the wager, the S&P index fund had gained 125.8%. The hedge funds were up an average of around 36%.
A key element of the index fund strategy, however, is that you don’t put everything in at once.
If you do want to do it yourself, Buffett says you need to know three investing principles that have guided him since he was a young man.
They’re from a book first published in 1949: “The Intelligent Investor” by Benjamin Graham. Buffett read it while he was an undergraduate at the University of Nebraska.
Click here to view CNBC’s summary of “Warren Buffett: Guide to Investing”
Posted by Melissa Zheng, Associate Editor, Wealth Strategies Journal.