Buffett’s Pointed Investment Advice: Don’t Try to Pick Winners

Source: Getty Images

Source: Getty Images

At this point, Warren Buffett has been institutionalized as a sort of investment sage — not a pundit, but someone who is too old and successful to be full of anything but good advice. During his tenure as chairman and chief executive officer of Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB), Buffett has championed a philosophy of common-sense value investing, and every step of the way he has communicated his thinking in plain English.

Each year, Buffett writes a letter to Berkshire shareholders, telling them not just what is happening at the company but why. The letters are usually dense with good advice, pointed or indirect. This year, the letter will come on March 1, but CNN Money obtained an excerpt, and it’s a pointed piece of advice for investors: invest in what you know, invest in productive capital, and invest for the long term. And buy a copy of The Intelligent Investor by Benjamin Graham.

If you’re already familiar with Buffett’s previous letters to shareholders or if you’ve watched him speak and answer questions, then you may have heard all of this advice before. Buffett has adhered to the same general investing principle for nearly his entire career.

In the excerpt, Buffett tells, for the nth time, that reading The Intelligent Investor changed his life — “Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses)” — and he reiterates that you don’t need to be a rocket scientist to achieve satisfactory investment results. He says focus on the productivity of an asset, not simply on its price — “Price is what you pay; value is what you get” — and he says to try to ignore the cacophony of punditry.

It’s all sound advice, as clear and concise as Buffett has ever been, but his words can sometimes be difficult to translate into an actionable investment idea. Buffett encourages investors to understand the businesses they are investing in, to be confident in their ability to project future performance to a reasonable degree, and to evaluate assets to determine how they are priced in relation to the fundamentals. This is asking a lot of a retail investor, of a mom-and-pop investor, and even some active investors, who it may be more accurate to call speculators.

But Buffett does not shortchange his readers (not that we paid anything for the lesson) and pushes would-be investors toward a time-tested investment that is about as foolproof as they get. “In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts),” Buffett says in the shareholder letter. “The goal of the nonprofessional should not be to pick winners — neither he nor his ‘helpers’ can do that — but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.” He even suggests one he likes, Vanguard’s 500 Index (VFINX).