By John Wasik
CHICAGO Dec 17For as long as I can remember,
the investment maxim that most evokes a mix of adulation and
performance anxiety is "Invest like Warren Buffett."
How can mere mortals emulate an investing deity? In truth,
most of us will never come close to "the Sage of Omaha." He's
done all the things a stellar investor should do: He buys when
there's blood in the street, finds solid companies at great
prices and keeps them "forever." Lacking Buffett's phenomenal
verve and mettle, though, most of us won't do this. But that
doesn't mean we're doomed to failure.
Fortunately, the multibillionaire chairman and chief
executive of Berkshire Hathaway Inc. has been generous
with his wisdom and two recent books published in November
compile and analyze it elegantly: "Tap Dancing to Work" by Carol
Loomis, a long-time Fortune writer and Buffett friend and
"Think, Act and Invest Like Warren Buffet" by Larry Swedroe,
principal and director of research for Buckingham Asset
What key advice resonates most?
1. Stick with index funds
Although you probably won't get the returns of Berkshire
Hathaway with index funds, you can still get pretty
close to market returns without having to be an oracle yourself.
"If individuals "aren't going to be an active investor --
and very few should try to do that -- then they should just stay
with index funds. Any low-cost index fund," Loomis quotes
Buffett as advising. "And they should buy it over time. They're
not going to pick the right place and time."
2. Don't play Buffett's game
Although Buffett is often able to time his purchases
brilliantly, chances are, you won't. In fact, research shows
that most individual investors' records on timing the market
successfully are dismal.
One of the most important Buffett shibboleths is
acknowledging that you won't be able to predict the market. If
you take his advice on index funds and stay the course, "the
only way an investor can get killed is by high fees or by trying
to outsmart the market," he said in 2008.
No big secret here. When you find good stocks, buy them at
low prices and hold them. For those buying individual stocks,
this means dollar-cost averaging -- fixed investments every
month -- and reinvesting the dividends. Most large companies
offer dividend reinvestment plans for this purpose.
Swedroe reinforces Buffett's advice by citing academic
studies that actively managed mutual funds show "no evidence of
the ability to persistently generate outperformance beyond what
would be randomly expected." So a passive strategy can work for
Most individuals also get scorched on transactions and
trading costs. You can inexpensively own most of the stock and
bond market through two funds: The Vanguard Total Stock Market
Index ETF and the Vanguard Total Bond Market Index fund
. The company charges you 0.06 percent and 0.22 percent
annually, respectively, for managing those funds.
3. Think long term
Buy durable enterprises that will produce profits for
decades, not quarters. Buffett has bought into enterprises like
BNSF Railway Co and Coca-Cola that have been around for a long
time and are not going away. They have good prospects not
because of recent "rear-view" quarterly earnings reports. When
Buffett says he's buying "businesses," he's committed to
managements that generate cash, profits and dividends decades
into the future.
4. Keep your cool and be a contrarian.
Booms and busts don't seem to phase Buffett, who will hold
onto his cash when most are buying and open his wallet when the
market crashes. He's not distracted by television blowhards or
prevailing sentiment -- emotions that can derail even the
smartest and investors. He knows how to seize opportunities when
most investors are seized by fear.
When Goldman Sachs called him to take a stake in the company
at the height of the 2008 meltdown, Buffett got some incredible
terms on his $5 billion investment: A 10 percent annual dividend
and repayment that eventually netted him $1.7 billion when
Goldman paid him off early last year.
Who do you know can demand and receive a legitimate 10
percent dividend these days?