Wednesday, 12th March 2014

Lessons from Warren Buffet’s 2014 letter to shareholders

Written by George Traganidas Topics: Property Investing, Stock Investing, Wealth Building

Warren Buffett

On Saturday 1st of March, Warren Buffet released his 2013 annual letter to shareholders of Berkshire Hathaway. As always his letter is a great read, because it does not only tell you about his company but also gives general advice on investments and finance. He has been helping people for years to better understand the investment process and what they should look for and what to avoid. His insights on how to value companies are priceless. In addition, he sometimes gives general finance advice to help people who are not investment professionals themselves and they just want to look after their wealth and grow it.

This year’s letter is no exception. Among the 23 pages of the letter, he includes two great pieces that are a must read for anyone who has a general interest in investing. The first one that is labelled “Some Thoughts About Investing” and describes what investors should look for when they are valuating an investment. His advice is not specific about stock investing, but covers every potential investment. This piece Warren has also publishes as a separate article in Fortune magazine. You can find a link to the annual letter and the Forbes article on the <>Articles<> page.

The second piece is investment advice is for people who do not know anything about investments or they do not want to spend any time learning. It is the instructions that Warren has left to his trustee on how to invest the money he will leave to his wife when he is not around any more. Here is the expert from the letter:

“What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not 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.”

He pointed that anyone will do fine with the strategy above. It’s low cost, it’s in a bunch of wonderful businesses and it takes care of itself.

When his letter was published people had three questions about this simple advice. Why Vanguard, why the 10% bond allocation and why not put the money in Berkshire Hathaway.

To answer the first question of why he chose Vanguard, Warren said that the reason was the low cost. Vanguard is a low cost index fund and keeping costs to a minimum is enormously important to investing (whether it is stocks or any other investment). Any annual cost is like a tax to your investment.

To answer the second question of why the 10% bond allocation, he said that the reason for it is that if there’s a terrible period in the market and she’s withdrawing 3% or 4% a year, she can take it out of the bonds instead of selling stocks at the wrong time.

To answer the third question of why he did not recommend Berkshire Hathaway, he said that he would not like to be touting his company to people. He has no problem though touting the S&P500 at a low cost.

As always Warren’s advice is simple to understand and follow. He is not shy of helping other people understand investments and building wealth.

Follow the practical way,
George

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2 Comments to Lessons from Warren Buffet’s 2014 letter to shareholders

faqeco
15 June 2014

Dear George,
I’m Minh in Vietnam.I want to buy Vanguard S&P 500 index fund as Warren Buffet recommendation.However, I found no option for Non Us resident like me.Do you know how to buy it as a non US resident or any company which offers the same stock like Vanguard S&P 500 index fund? Thank you very much.

admin
25 June 2014

Minh,

Vanguard has an S&P 500 index fund ETF that you can trade like ordinary stocks. You just need to open a brokerage account that allows you to trade US stocks. I include here a link to the ETF.

https://personal.vanguard.com/us/funds/snapshot?FundId=0968&FundIntExt=INT#tab=0

Regards,
George

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