Taking Personal Finance Tips From Warren Buffett by Morningstar Investment Research
The legendary investor offered his opinion on a lot more than just stocks at this weekend's Berkshire Hathaway company meeting.
In his most recent letter to shareholders, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett raised more than a few eyebrows by revealing that, upon his passing, he has requested that 90% of his wife's share of his estate be invested in a low-cost index fund that tracks the S&P 500 and that the remaining 10% be held in short-term government bonds.
The reason? Buffett says the index fund would likely outperform an investment portfolio run by "high-fee managers."
Hearing one of history's great stock-pickers advocate index funds--for his wife, no less--came as a surprise to many, but it wasn't the first time Buffett has offered his opinion on financial matters beyond merely which stocks he likes. On Saturday, before a capacity crowd inside the CenturyLink Center Omaha Arena, he and company vice chairman Charlie Munger fielded questions from journalists, analysts, and shareholders gathered for the company's annual meeting. Many questions concerned the company's performance and future plans, but others were broader, offering a glimpse at Buffett's outlook on matters of personal finance that could be useful to just about any investor.
Naturally the bulk of the questions and answers concerned investing, and among the first was why Buffett would choose an S&P 500 fund for his wife's inheritance. Reminding the audience that all of his Berkshire Hathaway shares will be given to charity, Buffett seemed to suggest that cash left in his estate for the benefit of his wife would best be put to use in an index fund rather than in riskier investments. "It's not a matter of maximizing capital," he said. "It's a matter of peace of mind."
Later, another questioner mentioned the company's recent underperformance relative to the S&P 500, which it uses as a benchmark. The firm has trailed the index in four of the past five years, including an 18.2% gain in 2013 compared with 32.4% for the index (including dividends). Buffett said his firm is likely to lag the index during some market rallies, such as the current bull market. "If you have five strong years in a row, we will not beat the S&P," he said.
Anyone who has ever kicked himself for missing an investing opportunity might take solace in knowing that even Buffett seems to do this. He discussed using the firm's cash reserves too early when the market tanked in late 2008. "Obviously we didn't do remotely as well as if we'd kept all the powder dry until the bottom in March 2009," he said. "But we haven't figured out a way to do that, and we're not going to figure out a way to do that."
During a discussion of his flaws as an investor, Buffett admitted that at times he has stuck too long with managers of his companies when he should have shown them the door. While he wasn't talking about investment managers, individual investors who have stuck too long with underperforming fund managers or financial advisors might ask themselves if they have the same flaw.
Buffett said that what excites him isn't so much buying stocks but buying businesses. "We want to buy big businesses with good management and reasonable prices and build them over time," he said. It's a good lesson for individual investors to remember. Watching the daily share price movements of a stock you own may be intoxicating, but it's owning quality businesses--such as those with wide-moat ratings--over long periods of time that improves one's odds of investing success.
One topic Buffett clearly feels passionate about, and that should be on the radar of individual investors as well, is corporate governance. Responding to a question on the topic, he said that far too many companies fill their boards with members who enjoy the pay and perks but have little incentive to rock the boat. "They do not look for Dobermans; they look for cocker spaniels," Buffett said. (Buffett himself was questioned at the meeting about his controversial decision to abstain from a vote on executive pay at Coca-Cola (NYSE:KO). He said he wasn't interested in "going to war" over the issue.)
Paying attention to stewardship is also important for fund investors, as shown by a recent Morningstar report finding that fund companies that are good stewards of capital tend to deliver better outcomes than those that are not.
On Knowing One's Limitations
One questioner referenced earlier remarks from Buffett about finding one's "circle of competence" as an investor--another way of saying stick to companies and industries you understand--and asked how one can identify what his or her circle is. Buffett struggled for an answer but suggested it's a matter of "being realistic about assessing your talents and shortcomings." He also suggested that those unsure as to what their own circle of competence is ask friends for feedback to help identify it.
On Finding a Career
At one point, a young man in the audience asked Buffett what he'd recommend for a 23-year-old today who is inclined to entrepreneurship but has no interest in going into technology. Buffett at first said if it were him he'd still go into investing, but mentioned that one good way to find a path is simply to learn whatever one can about many different businesses. He recalled visiting coal companies when he was a young investor and asking which of their competitors their executives thought would be the best investment and which would be the worst. Before long he'd become an expert on the industry.
"You can learn about the economic characteristics of companies by reading and personal contact," Buffett said. "You have to have a real curiosity about it. ... If you just keep learning things, something will come along that you find extremely useful to you."
One additional personal finance lesson from the meeting came during a discussion of the spending habits of one of the world's wealthiest men. Buffett, famous for his frugality, said he has everything he wants--and with a net worth estimated at around $65 billion, who could blame him? But he also said that extravagant spending leads to diminishing returns on happiness. "I do not think that standard of living equates with cost of living beyond a certain point," he said. "... My life could not be happier. In fact, it would be worse if I had six or eight houses."
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