Advice from the Oracle

In ancient times, the Greeks went to Delphi to get advice. Today, investors go to Omaha.

Warren Buffett released his annual letter to shareholders on Saturday, and as usual, it is filled with sage advice. Some of it is cute, like “invest in a company any idiot can run, because sooner or later one will.” Some is more philosophical, as in, “Games are won by players who focus on the playing field—not by those whose eyes are glued to the scoreboard.

But this year he makes some good points about what to avoid. First, avoid acting too often. If you read the investing press, you will constantly be urged to be more active by people who profit from your activity. Slow down, Buffett says. Transaction costs can add up, and rob you of your return. Keep your costs minimal.

Second, ignore the macro environment. Think of the stocks you own as businesses, and try to purchase businesses whose earnings power will increase over the next five years or more. He didn’t worry about real estate or stock prices during the Financial Crisis. The earth was not going to open up and swallow the human ingenuity and productive assets that exist in America.

Finally, he says to ignore predictions about interest rates and price changes when you buy stocks. Instead, focus on the productivity of your assets. If you own a farm, will it be able to charge more for its corn? If you own part of an office building in New York, will its rent go up? If the answer is yes, then the asset it sound.

Buffett has prospered over the years by focusing on the fundamentals. “Ignore the chatter, keep your costs minimal, and invest in stocks as you would a farm,” he notes. Not a bad idea, when the news is so distracting.

Douglas R. Tengdin, CFA

Chief Investment Officer

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