Of course, investing is not for everyone, and it is essential to be aware that capital is at risk with investments. Nonetheless, for those who decide this is an avenue for them, they may choose to reflect on Warren Buffett and his success.
Mr Khalaf highlighted five buffetisms, but it is important to be aware that investments come with risk and that suggestions should not be relied on by consumers.
Do not “ diworsify ”
âDiversification is a protection against ignoranceâ according to Buffet, and âmakes little sense to those who know what they are doingâ.
âLooking at Berkshire Hathaway’s list of holdings, it is clear that Buffett practices diversification to some extent, but he also invests with conviction,â Mr. Khalaf said.
âUK investors should be wary of downgrading their portfolios, especially closet tracking funds that hug an index and charge an active fee to do so.
âThese funds are long-term destroyers of wealth and should be phased out in favor of low-cost follow-on funds, or truly active funds.
âBuffett’s point is that if you’re going to invest selectively, you have to know enough to do it with conviction, and that’s something UK investors should demand from their active funds.
“If your fund is diversified into most stocks in the market and charges a fee for active management, it’s time to vote with your feet.”
Beware of cryptocurrencies
Buffett doesn’t like cryptocurrencies, calling Bitcoin ‘squared rat poison’ and stating in 2018 that cryptocurrencies ‘will end badly’.
âIt’s an extreme view, but the nature of investing in cryptocurrency is such that extremes, good and bad, should be counted as clearly possible outcomes.
âInvestors who decide to invest in cryptocurrency should therefore only do so with a small portion of their overall portfolio that they are prepared to lose.
Buffett believes that Bitcoin has no intrinsic value, and it’s hard to question that point of view, especially in a world where payment technologies have already made money highly digital.
âBuffett has a similar view of gold, although that makes Berkshire Hathaway’s purchase of mining company Barrick Gold in 2020 somewhat confusing.
“Inconsistency or conundrum, depending on your perspective, is only to be expected for an investor whose words and actions have been studied for decades.”
âBuffett’s plea for follow-up funds is another curiosity and, at first glance, doesn’t make much sense to a man who made his fortune by actively managing his money.
âIn the 2016 Berkshire Hathaway report, Buffett wrote ‘when billions of dollars are managed by Wall Streeters charging high fees, it’s usually the managers who reap inordinate profits, not the clients. Large and small investors should stick with a low cost index. funds.’
âThe point is well done, albeit by an active manager, and UK investors today have a plethora of low-cost passive funds that can form the building blocks of a portfolio.
âHowever, there are some areas where active management can certainly add value, for example in small business and income investing.
âWhile overall active managers may not be able to beat the market, some exceptional fund managers have demonstrated an ability to outperform over the long term.
âAs Buffett concedes in the same report,â there are, or of course, skilled people who are very likely to outperform the S&P over long periods. âUK investors don’t need to choose exclusively between approaches active and passive, and it would generally be a good idea to have a combination of both in their portfolios. â
âBuffett likes to receive dividends, but Berkshire Hathaway does not. As he wrote in 2013: âA number of Berkshire shareholdersâ¦. wants Berkshire to pay a cash dividend. It puzzles them that we appreciate the dividends we receive from most of the shares Berkshire owns, but pay nothing ourselves.
âPart of the rationale is that Buffett has plenty of opportunities to reinvest the dividends he receives into his portfolio, unlike companies that pay the dividend, which are typically limited to the industries in which they operate.
âBritish investors are in the same boat as Buffett is on this one.
âThe dividends they receive from their holdings can be reinvested in the same funds and companies that generate them, or reallocated elsewhere in the portfolio, to supplement existing positions or create new ones.
âThe long-term benefits of rising dividends are obvious, especially when investing in such a high yielding market as the UK.
“Over the past twenty years, the FTSE All Share has returned 39 percent with no dividends included, and 178 percent with dividends reinvested.”
Growth and worth are ‘related to the hip’
âBuffett is well known for being a value investor, a style that has been out of favor over the past decade, and which is generally contrasted with growth investing.
âBut as Buffett noted in his 1992 letter from the president,â the two approaches are hip-related. Growth is always a component of calculating value. “
âThis explains how a so-called value investor like Buffet comes to own a large chunk of Apple, a tech stock more commonly associated with a growth style of investing.
âBuffett’s point is that to come up with an estimate of a company’s intrinsic value, you have to understand its growth prospects.
âThis observation is particularly relevant at the moment, as since the arrival of vaccines, value stocks have started to outperform growth, reversing a ten-year trend.
âBuffett’s perspective suggests that value and growth are not mutually exclusive at the stock level, and extrapolate somewhat, nor at the fund manager level.
âThere is a spectrum, with some stocks exhibiting higher levels of value characteristics, and others exhibiting more growth characteristics. Likewise, most fund managers incorporate both value and growth considerations to varying degrees and come to be characterized as growth or value investors.
âTake for example the most recent kid who made investments in growth in the UK, Terry Smith, whose mantra is ‘Buy good businesses, don’t pay too much, don’t do anything’. Fundsmith’s principle of not paying too much clearly speaks of some consideration of value, alongside an analysis of the quality of the underlying business.
âYou can expect growth and value drivers to each have their day in the sun, and indeed the outperformance of one over the other can last a long time.
“Investors should have a mix of styles along the value and growth spectrum, so that no matter how the wind blows, their portfolios are gaining ground.”