Thursday, May 1, 2014

Successful Investing: Warren Buffett Wisdom

Every year tens of thousands of people make the pilgrimage to Omaha, Nebraska to listen to arguably the most successful investment manager of all time, Warren Buffett. The extremely popular event starts this Monday. Undoubtedly, some are hoping to glean some investment secret or word of wisdom that they can turn into investment gold. And who can blame them? In a world where we are constantly bombarded with hot investments, market forecasts, and pundit predictions it seems nearly impossible to ever be sure what to do with our money. Thankfully, Warren Buffett does dispense some great advice and it is actually much different than what you might expect.

Warren Buffett often gives some of his best advice in his annual letter to shareholders. He has a knack for expressing ideas with added importance and significance few others are capable of. This year was no exception. I highly suggest you read the entire letter, but for the sake of time and space we will share our favorite excerpt from this year’s letter. In a list he calls “fundamentals of investing” Buffett wrote the following:

Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.  
-Warren Buffett, 2014 Letter to Shareholders

In other words: "Focusing on the wrong things can really mess up what you really care about." But how do we know what is truly important? A common theme at Legacy Financial Group is “focus only on what you can control.” Diversification, for example, is always within an investor’s control, but many things are not. The combination of Legacy’s words and Buffett’s could be said this way: “Focus on what is truly important and within your control.”  

Carl Richards is a well-known financial blogger and advisor. Visit his website by clicking here.  He is primarily known for boiling down complex concepts into easily understood sketches. The picture above is one of our favorite sketches.

There are things in life that really matter and things that don’t. There are also things in life you can control and things you cannot.  The intersection of the things that matter and the things you can control is where you should focus if you want to be a successful investor.

There are many aspects we can control that matter a great deal to a successful investment outcome. Investment costs, diversification, risk exposure, tax efficiency, and rebalancing are good examples of what we can control that will greatly increase your odds of investment success. In addition, non-investment related items that you can control include your savings rate, standard of living, retirement age, and financial plan. These things all matter a great deal and are well within our control. Market changes, pundit predictions, and economic forecasts are definitely not in our control and have very little impact on your long term financial success.  But don't take our word for it, just look at what the greatest investor of our time has to say. The keys to successful investing are surprisingly simple once you clear out all the noise.

“Past performance does not guarantee future results.  Diversification does not eliminate the risk of market loss. General investment risks include loss of principal and fluctuating value. International investing involves special risks such as currency fluctuation and political instability.“  

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