Buffet’s advice to amateur investors
BUY an index fund, preferably over time, so you end up owning good businesses at a reasonable average price…. And that is all you have to do.
WHEN the world’s second-richest man speaks we ought to listen. Warren Buffet, the Oracle of Omaha, recently shared with USA Today the three biggest mistakes that amateur investors make. The mistakes that you should avoid are:
1. Trying to time the market.
Buffet says that people who “think they can predict the short-term movement of the stock market—or listen to other people who talk about [timing the market] are making a big mistake.”
Does this mean then that there’s no reason for small-time, individual stock investors (and even seasoned, big-time investors) to rely on technical analysis? I guess so. Forecasting the short-term direction of stock prices through charts is like predicting that an earthquake will happen tomorrow, next week or next month.
Buffet tried technical analysis for eight years and it cost him a lot of money. So he abandoned it because he realized that it didn’t work. He explained that he didn’t get a different answer when he turned the chart upside down.
Think again if you intend to pay for daily or weekly stock picks that are purely based on technical analysis. You will probably have the same chance of getting it right if you consult the fortune-tellers of Quiapo.
2. Trying to mimic high-frequency traders.
According to Buffet buying stock in a good business and holding on to it for the long term is a better strategy than frequently flipping stocks. “If they are trading actively, they are making a big mistake,” Buffett says.
This is perhaps another reason you should ignore most of the weekly or monthly stock tips from stock-brokerage firms or groups allied with stock brokers. It doesn’t take a rocket scientist to realize that brokerages want you to trade as often as possible. After all, a big chunk of their revenues comes from broker’s commissions. You can just imagine the huge drop in their income if most of the clients of a brokerage firm will follow Buffet’s “buy and hold for a long time” strategy.
Buffet says “you don’t need to look at the prices of the stocks you own from week-to-week, or month-to-month, or even year-to-year.” Use your time more productively instead of obsessing in your stocks’ short-term performance.
3. Paying too much in fees and expenses.
Another big mistake according to Buffet is if investors “are incurring large expenses in connection with their investing.” He says that there is no reason to invest in a mutual fund with expensive management fees when there are super-low-cost index funds.
This is more applicable in the US where there are a lot of index funds which investors can choose from. In the Philippines only a handful of funds from the 145 listed mutual funds and UITFs track the stock market index. Just the same, if you want to invest in an index fund compare the fees.
Buffet says that “the nice thing about investing in stocks is that, over time, equities are going to do well” and that doing reasonably well in stocks investing “is very, very easy.”
The secret according to Buffet:
“BUY an index fund, preferably over time, so you end up owning good businesses at a reasonable average price…. And that is all you have to do.”
“If you own a cross-section of American businesses, and you don’t get excited [and buy] just at the very top, and if you buy in over time, you are going to do well.”
The same can be said for investors in the Philippines.
One implication of Buffet’s advice is that you don’t have to invest directly in individual stocks to be invested in the stock market. You can do it by investing in mutual funds or UITFs. And if you want your investment to match the performance of the stock market, put your money in an index fund.
You can actually mimic the performance of the market index through direct investment in stocks. But it will take a lot of money because you will have to own stocks of the 30 companies that comprise the PSE composite index. So why bother if you can get the same results by investing a smaller amount in a passive investment like an index mutual fund or UITF?
It is also important to invest regularly as opposed to trying to time the market. That is what Buffet meant by buying over time. You will never be able to predict with a high degree of certainty the “right,” “best,” or “perfect” time to invest in stocks. If it were that easy, nobody would lose in the stock market. Over the long-term, steady investing will almost always beat speculative investing.
Alvin Tabañag is a Registered Financial Planner of RFP Philippines. He is personal money management coach and founder of Pinoy Smart Savers Learning Center. He is the Best-Selling book author of “12 Steps to Build Wealth on Any Income”.
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