Annabelle Dickson
6 minutes reading time
We all learn from those who come before us, and luckily, the basic principles of investing rarely change. While making mistakes is an effective way to learn, learning from others can save you time, money and stress.
With that in mind, we pulled together some “sage wisdom” from some of the world’s great financial gurus. They may not help you pick the next Nvidia, but they could help you avoid making an expensive blunder.
Warren Buffett on the corrosive effects of fees
“If returns are going to be 7 or 8 percent and you’re paying 1 percent for fees, that makes an enormous difference in how much money you’re going to have in retirement1.” – Warren Buffett, Berkshire Hathaway
Our take
Small differences add up over the long term. Less than one percent per annum over 40 years can add up to hundreds of thousands of dollars of difference, as we explained in this article.
And while trying to increase returns can be somewhat unreliable – generally it means taking on more risk – finding ways to reduce the fees on your portfolio, for example by can be easier and more reliable and doesn’t need to mean higher risk.
The importance of long-term thinking
“If you can step back and take a longer time horizon, that is the big secret2”. – Joel Greenblatt, Gotham Asset Management
“Design a portfolio you are not likely to trade… akin to premarital counselling advice; try to build a portfolio that you can live with for a long, long time3.” – Robert Arnott, Research Affiliates
Our take
While shares can be volatile in the short term, they can provide capital growth over the long term, even in the face of significant events like the COVID-19 pandemic, the global financial crisis, and 9/11. It’s easy to be swayed by the constant stream of negative financial news and daily share price reports, which can make market volatility seem never-ending.
Timing the ups and downs of market moves is incredibly difficult, as we’ve discussed previously. Instead, a good approach for most people may be to simply set a strategy that’s suitable for their financial objectives and risk tolerance, and stick with it regardless of short-term market conditions.
Performance chasing: A recipe for underperformance
“From 2000 to 2010, this was a period where the market was flat but the best-performing managed fund for that decade was up 18 percent a year. The average investor in that fund managed to lose 11 percent a year on a dollar-weighted basis by moving in and out at all the wrong times.
Every time the market went up, people piled into that fund, and when the market went down, they piled out. When the fund outperformed, they piled in, when the fund underperformed, they piled out4.” – Joel Greenblatt, Gotham Asset Management
Our take
Even for investors who do invest for the long term, switching between the latest hot trends and high performing funds is a dangerous game. This is due to a concept called ‘mean reversion’. The idea is that when an asset performs significantly above or below what it usually does for a period of time, it tends to give back some of those gains or losses in the following periods – or revert to the long-term mean (average).
Why Buffett loves indexing and ETFs
“The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low-cost way5.” – Warren Buffett, Berkshire Hathaway
Our take
Given Buffett is famous for his canny ability to make great investments, you might not expect him to be spruiking the benefits of index funds. But Buffett has long espoused the benefits of indexing, and has even said that his wife’s inheritance is to be invested 90% in an S&P 500 index fund6.
Investors like Buffett who can outperform the broader market over the long term are rare. However, anyone can get market returns for a low cost through funds that track a widely diversified index.
The danger of selling winners and keeping losers
“Some people automatically sell the “winners” – stocks that go up – and hold on to their “losers” – stocks that go down – which is about as sensible as pulling out the flowers and watering the weeds7.” – Peter Lynch, Fidelity
Our take
Although the broad market has tended to rise over the long term, just a tiny number of companies (~2.4% of the overall market) have accounted for those returns, with most underperforming short-term US Treasury Bills8. So it makes sense to want to hold onto the winners, right?
However, many investors may look to sell their winners and hold onto (or even add more to) their losers – a process that Peter Lynch calls ‘pulling out flowers and watering weeds’.
Picking the small fraction of winners out of the huge numbers of listed companies globally is beyond the abilities of most investors. But by buying all the companies in the index, investors can be confident of capturing the big winners.
Even better, market cap-weighted indexes are typically constructed so that underperforming companies will fall in weight, eventually dropping out altogether, while the top performing companies take on a larger weight over time.
The dangers of chasing speculative assets
“If you’re stupid enough to buy it, you’ll pay the price for it one day9.” – Jamie Dimon, JPMorgan Chase & Co
Our take
Jamie Dimon might not be the first name that comes to mind when thinking of investment figures and quotes, but his candid advice is worth listening to, especially for those who care about not losing money.
As the CEO of JPMorgan Chase & Co., the world’s largest bank with a market cap above US$500 billion10, Dimon has led the institution since 2006, successfully navigating numerous financial crises.
While speculative investments can be tempting, especially when others appear to be profiting, adhering to a long-term, broadly diversified investment strategy is a proven way to build wealth. Though it may not be the most exciting approach, it significantly reduces the risk of losing your hard-earned money on a single risky bet.
Simple, but not easy
You may have noticed that none of this is particularly complex – no difficult formulas or innovative strategies are required. But simple doesn’t mean easy. Good investing requires patience and discipline, traits not everyone is blessed with.
If you stick with it though, it’s a great way to build financial security for you and your family.
References:
1. CNBC
2. Bloomberg
3. AZ Quotes
4. Bloomberg
5. CNBC
6. Market Watch/Berkshire Hathaway AGM
7. One Up On Wall Street, by Peter Lynch and John Rothschild. Originally published in 1990 by Penguin Books.
8. Source: ASU, WP Carey School of Business
9. Source: CNBC
10. Source: Companies Market Cap (in AUD)
