Week 7: Warren Buffet


Week 7

Warren Buffet

For investors starting out consider advice from the world’s greatest investor, Warren Bu et, keep it simple and adopt a low-cost strategy.

All investors recognize Warren Buffet as the greatest investor the world has ever known and we all have a lot to learn from his disciplined and conservative approach to investing. Instead of focusing on the short term, Buffet advocates the long term, and he hates risk, preferring to buy companies that more active investors would consider boring. Buffet famously once described his investment style as ‘85% Benjamin Graham’, well known as the founder of value investing. Buffets performance speaks for itself as his investment vehicle, Berkshire Hathaway, has shown consistent returns for over a half century.

The five key benefits of following Buffets style can be summarized as follows:

  1. You can sleep well knowing you are following the advice of the greatest investor of all-time, Warren Buffett.
  2. By buying and holding for decades while reinvesting dividends, the power of compounded returns is realized.
  3. With passive indexing in low cost index funds, you are keeping fees as low as humanly possible which maximizes returns.
  4. You are maximizing tax efficiency by buying and holding for decades instead of days (only relevant when investing in a
    personal portfolio versus a retirement account).
  5. The portfolio is easy to implement and straight-forward to follow.

To illustrate the simplicity of building a Warren Buffet style portfolio we will outline here his most basic approach to investing, which
can be used by new investors to start out in a disciplined and extremely focused way. Of course, as your maturity as an investor grows
we recommend branching out into actual stock selection, based of course of Buffets principles, but in the meantime starting out to
build the base for a Buffet style portfolio can be extremely simple.

In fact, you can start with just two (2) holdings, the S&P 500 and a short-term US government bond fund, and depending on how
young or inexperienced you are, you can even just buy a standard S&P 500 fund. For a start take a look at the popular Vanguard range
of funds, of which you can buy a mutual fund or an exchange traded fund (ETF):

  1. S&P 500 index fund
  2. Short-term government bonds fund

In one of Buffets famous annual letters to his shareholders in Berkshire Hathaway, he provided his ‘followers’ with his simple
portfolio mentality:

“My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost
S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained
by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”

Buffet also particularly likes the Vanguard range of funds over other providers because the funds have lower costs compared to other
comparable funds and types of investments.