Warren Buffett was recently interviewed by US network CNBC, their 10th year in a row of speaking with the 'Oracle of Omaha' following his latest annual letter to shareholders. Here are three gems of wisdom from this latest interview:
- There's always a reason to wait
"There's always a reason to wait and I've listened to that all my life. You know, when I got out of school…there'd never been a year when the Dow had not been below 200 during the year. And then you know, we ran into price controls, we ran into the oil shocks, you name it, just all kinds of things. And those are diversions."
Needless to say, with the Dow currently above 20,000, owning stocks has been a decent financial decision for Mr Buffett. Here in Australia we're grappling with rising unemployment, low interest rates and an is-it or is-it-not housing bubble.
Yet people will still need loans from the likes of Commonwealth Bank of Australia (ASX: CBA), they'll still buy fried chicken from Collins Foods Ltd (ASX: CKF), and there's a fair chance that Insurance Australia Group Ltd (ASX: IAG) will be around for the long haul.
Mr Buffett himself recently poured another $20 billion into a variety of investments over the Christmas period, including shares in US tech giant Apple.
- Interest rates act like gravity on valuation
"but the risk always is that – interest rates go up a lot, and that brings stocks down."
There are two ways higher interest rates can impact shares, a) by making alternative investments such as savings accounts and bonds more attractive, and b) directly by impacting earnings through higher interest expenses and other ways. After all, why would you buy Wesfarmers Ltd (ASX:WES) for its 4.6% yield if you could get 7% in a savings account?
While higher interest rates can make current stock prices look expensive in comparison, Mr Buffett also noted that not owning stocks simply because interest rates were low could prove an expensive mistake:
"If there's a game it's very good to be in for the rest of your life (investing), the idea to stay out of it because you think you know when to enter it – is a terrible mistake."
- Diversify across a broad group of companies
"And the best thing with stocks actually is to buy 'em consistently over time. You wanna spread the risk as far as the specific companies you're in by owning a diversified group, and you diversify over time by buying this month, next month, the year after, the year after, the year after.."
Diversifying in this manner both spreads out the risk by company, and by time – by adding to your investments over time, you're reducing the risk of buying shares at a time when they are theoretically expensive. A good strategy can be to allocate a set amount of money each month for stock purchases. This can result in lower volatility and attractive returns over time. With 1,972,595% growth in the market value of Berkshire Hathaway's investments since 1964, investors could do worse than follow Mr Buffett's advice.
