Legendary investor Warren Buffet, CEO of Berkshire Hathaway, released his annual letter to shareholders on Saturday. The annual letter from the “Oracle of Omaha” is widely read by financial advisors and individual investors alike. Investors have a very good reason to pay attention to Buffet’s comments. Buffet’s strategy of investing in individual stocks and paying fair prices for great companies has beaten the S&P500 index since 1964. This year’s letter has three lessons every investor should understand.
“In America, equity investors have the wind at their back.”
When Berkshire Hathaway buys stocks, Buffet looks at those investments as owning a business. Investment portfolios are more than just a collection of ticker symbols and company names. The best way to invest for the long run is to invest in companies with a long track record of running successful and profitable businesses. Long-term investors should ignore the opinions of media analysts, chart patterns, and similar short-term market timing fads. It is much more important to find companies with a history of steady dividend payments (dividends are the portion of a company’s earnings that are paid to shareholders) that build value in the long run. Over the past 90 years, 40% of the total return on investments in the market has come in the form of dividends. History proves that long-term value investors earn good returns.
“Though markets are generally rational, they occasionally do crazy things.”
In the long run, the US economy and stock market both have a history of steady growth. However, in the short run, markets can go up, down, and sideways for reasons that are difficult to understand. The recent stock market correction is something many investors considered irrational, even though by the numbers it was overdue and not particularly violent compared to past market corrections. The best thing for investors to do is use some “walking around sense”, and be ready to take advantage of opportunities when the market becomes irrational.
“Betting on people can sometimes be more certain than betting on physical assets.”
This advice is probably more important than anything else in Buffet’s letter. For investors saving for retirement and other goals, and for retirees seeking to preserve their assets, having the right advisor is critical. Planning for retirement and beyond can be complex.
Saving money in the right places, minimizing taxes, having an estate plan that works, and taking an appropriate level of investment risk are all areas where most investors can benefit from having the right advisor.
Academic research shows that the markets reward long-term investors. The hardest part about being a long-term investor is staying fully invested when the market is irrational. During market turbulence, the best thing to do is often also the most difficult thing to do. For many investors, this makes the right financial advisor their most valuable retirement asset.