Warren Buffet, the billionaire investor with the Midas touch, has a message for Main street share investors. "The nice thing about investing in shares is that, over time, equities are going to do well," Buffett comments. "American business is going to do well. America is going to do well. So you have the tide with you." Building wealth in shares is still the way to go, even though the ride can get bumpy from time to time, Buffett, 83, says.
But to really profit from shares and build wealth over time, says Buffett, individual investors must avoid making costly mistakes that shrink their portfolio balances, just as a football team that wants to boost their odds of winning must avoid fumbling the ball away, throwing an interception or taking a penalty at a bad time.
Buffett was recently asked in an interview with USA Today to put on his personal finance hat and to tick off the three biggest mistakes amateur investors make. Here's his list.
Warren Buffet's "Top 3 Mistakes to Avoid"
1. Trying to time the market. "People that think they can predict the short-term movement of the share market - or listen to other people who talk about (timing the market) - they are making a big mistake," says Buffett.
2. Trying to mimic high-frequency traders. Buying shares in a good business and hanging on for the long term, he says, is a better strategy than flipping shares like a short-order cook flips pancakes. "If they are trading actively, they are making a big mistake," Buffett says.
3. Paying too much in fees and expenses. There's no reason to pay an expensive management fee to invest in a managed fund when super-low-cost index funds that mimic large indexes like the Standard & Poor's 500-share index are available, he says. "If they are incurring large expenses in connection with their investing," says Buffett, "they are making a big mistake."
Buffett, of course, is famous for buying shares when they are cheap, buying solid businesses that make a lot of money today and will make a lot of money tomorrow, and hanging on to his investments for a long time to better maximise profit potential.
The strategy works.
You don't become the richest person in America during your career with a lousy investment game plan. (Buffett, with a net worth of $58.5 billion, is currently ranked No. 2 behind Microsoft founder Bill Gates, who's worth $72 billion, according to Forbes magazine.) "Doing reasonably well investing in shares," Buffett says, "is very, very easy."
Here's how he says investors should play the investing game:
"Buy an index fund, preferably over time, so you end up owning good businesses at a reasonable average price," says Buffett. "And that is all you have to do." That's it? It's that simple? Buffett says yes.
"You don't need to look at the prices of the shares you own from week-to-week, or month-to-month, or even year-to-year," says Buffett. "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."
We wholeheartedly support Warren Buffett's recommendation of using low cost index funds as the basis of your share portfolio, and this is exactly the type of investment strategies we put in place for our clients. An example of an index fund for Australian investors is the ASX200 – a basket of shares made up of the top 200 companies on our stock exchange, which we often use in investor's portfolios.
If you would like more information in this area, please contact Dominique Schuh on 07 5480 4877 or at email@example.com.