Warren Buffett letter: 3 tips for stock investors

Warren Buffett letter: 3 tips for stock investors

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Warren Buffett knows just a bit about how to make money.

In his latest letter to his company’s shareholders, the billionaire and famed investor offered advice on how people with 401(k)s can boost their odds of success and build bigger retirement nest eggs.

Buffett, who is CEO of Berkshire Hathaway and is famous for his wise, long-term investment choices, offered the following tips in his letter to Berkshire’s shareholders on Saturday:

Treat stocks like businesses not tickers

“I view the stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their ‘chart’ patterns, the ‘target’ prices of analysts or the opinions of media pundits,” Buffett wrote.

Good businesses, he adds, will be good investments in the long run.

“We simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. Overall – and over time – we should get decent results. In America, equity investors have the wind at their back.”

Don’t invest with ‘borrowed’ money

Buffett says using borrowed cash to buy stocks, or buying “on margin,” is a risky proposition for individual investors. Why? It can amplify losses when stocks plunge and cause you to panic, he warns.

To make his point, he showed a chart showing four major drops in Berkshire’s stock going back to 1973, with losses ranging from 37.1% in October 1987 when the stock market crashed to a 59.1% plunge from 1973 to 1975.

“This (data) offers the strongest argument I can muster against ever using borrowed money to own stocks,” Buffett said. “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

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Avoid high-fee investments

Buffett touted his recent win in a bet that he made back in December 2007, in which he wagered that a low-cost index fund tracking the S&P 500 stock index would post better returns over a 10-year span than five hedge funds that invest in other hedge funds and which are run by high-fee fund managers, often considered the “smart money” on Wall Street.

The S&P 500 won handily, posting average annual gains of 8.5%, topping all five hedge fund portfolios handily.

The takeaway: owning a broad basket of stocks and holding them for a long time is a better investment approach than a rapid-trading strategy or investing in high-fee investment products run by Wall Street pros that charge fees and whose job it is to “help” investors.

“Addressing this question is of enormous importance,” Buffett wrote. “American investors pay staggering sums annually to advisors, often incurring several layers of consequential costs. In the aggregate, do these investors get their money’s worth?”

More, often than not, Buffett’s bet shows, the answer is no.