Every year the world’s most famous investor, Warren Buffett, writes a letter to the shareholders of his company Berkshire Hathaway. The letter’s release is anticipated and dissected by the press with the same attention as the release of Oscar nominations and the NFL draft. But it’s not just fun for finance reporters. The billionaire’s letter usually serves up a few golden nuggets of advice for investors as well.
This year’s letter, released on February 25, is no exception. After highlighting Berkshire Hathaway’s strong returns in 2016—the company reported net earnings of $24.07 billion—Buffett shared his views on the future (positive) and suggestions for how investors can set themselves up to benefit.
Don’t bet against America.
Buffett praised the country for its “economic dynamism,” adding that “Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.”
Buffett warns against panicking over political upheaval or economic headwinds. Buffett, who’s always advocated long-term investing versus short-term bets on shifting perceptions, is long on America and U.S. companies.
Make fear your friend.
Like Tony Robbins and Franklin Delano Roosevelt, Buffett’s take is that you have nothing to fear but fear itself. In fact, he suggests using the emotion to your advantage to snap up discounted stocks or funds.
“The years ahead will occasionally deliver major market declines—even panics—that will affect virtually all stocks. No one can tell you when these traumas will occur,” he writes. “During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”
Beware high fees.
As a long-time advocate of passive investing in low-fee index funds (in fact, he’s on his way to win a million-dollar bet on an index fund), Buffett also has some strong opinions on the value of high-fee investment structures like hedge funds and mutual funds. The letter reiterates his position, criticizing “financial elites” like wealthy individuals for listening to the “siren song of high-fee managers” who use “esoteric gibberish” to justify their cut.
Buffett also singles out pension funds run for public employees. These funds have been pulling their members’ money out of hedge funds in recent years, after getting hit with a “double whammy—poor investment performance accompanied by huge fees.”
His preference, as always: a low-cost S&P 500 index fund.
Take a cue from John Bogle.
Finally, he pays tribute to “hero” and fellow investor John Bogle (also known as Jack), the founder of Vanguard, which introduced the first low-cost index fund in 1976.
“For decades, Jack has urged investors to invest in ultra-low-cost index funds,” writes Buffett. “In his early years, Jack was frequently mocked by the investment-management industry. Today he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned.”
Bogle, like Buffett, is a vocal proponent of low-cost index funds and investing for the long-term versus trying to time the market. And his investment strategy seems to have paid off—for his company and for himself. Vanguard Group is now among the world’s largest investment firms with more than 20 million investors and about $3.5 trillion under management. And Bogle’s personal net worth is estimated at about $80 million.