Warren Buffett's advice for you and me: Stick to good quality mutual funds

To say there’s much to learn from Warren Buffett is something hundreds of writers before have, and thousands beyond will, say. So, what’s the new learning from his 2013 letter to shareholders, released today? Some very heartening and inspiring ideas.

One, and most important, invest for the long term. What if as investors we can’t study businesses, make cash flow forecasts and evaluate risks around businesses? “I have good news for these non-professionals,” Buffett says. “The typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts).”

What does that mean? It means we use vehicles like mutual funds to allow our money to grow. It means we do not track them every day or quarter but do an annual review to see whether our funds are on the right track compared to the broader market. And stay invested.

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Indian mutual funds have delivered returns of 18-22 percent over 20 years. So, a one-time investment of Rs 1 lakh in 1993 is worth Rs 27 lakh to Rs 38 lakh today. And if you were a regular investor, diligently putting in Rs 1 lakh every year, that investment would be worth anything between Rs 1.46 crore to Rs 2.38 crore.

Two, even though macroeconomics is now the big thing and makes us feel smart, it is a waste of time. This can blur our vision of the business. For every sector that’s doing badly, there will a handful of companies doing well, and vice-versa. Macro commentary sounds cool on TV but is a distraction for us investors. “Forming macro opinions or listening to the macro or market predictions of others is a waste of time,” he says.

Three, we don’t need to be experts to make high returns. But we do need to recognise our limitations, keep things simple and learn to say ’no’ to get-rich-quick schemes. “Keep things simple and don’t swing for the fences,” says Buffett.

Four, we need to understand the future productivity of what we are buying. If you can’t, let the investment pass. If, for instance, you work in IT, you would know the new trends long before the analysts do. A little maths is all you need to evaluate the numbers behind those trends. But as an IT professional, you try and dabble in oil exploration, you might invite trouble. “Omniscience isn’t necessary; you only need to understand the actions you undertake,” he says.

Five, we need to stop looking at price change - that’s speculation, best left to traders, whose whole-time job it is to buy and sell. As investors, we need to keep our focus on the investment, the business. “Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it,” he says.

Six, steer clear of experts. “Owners of stocks too often let the capricious and often irrational behaviour of their fellow owners cause them to behave irrationally as well,” he says. “Because there is so much chatter about markets, the economy, interest rates, price behaviour of stocks, etc., some investors believe it is important to listen to pundits - and, worse yet, important to consider acting upon their comments.”

Got it?

At a time of extreme uncertainty, when the strongest of believers in the long-term are quaking with fear and jumping from stocks to gold to property to maximise their yields, the world’s greatest investor makes a strong and contrarian case for staying the course.

Read the full letter to shareholders below: