Legendary stock picker Warren Buffett celebrated his 90th birthday last weekend. He marked the occasion with Berkshire Hathaway, the holding company he runs, taking an equity stake in five historic Japanese conglomerates.
Buffett's milestone seemed like an appropriate time to highlight several critical insights he has shared over the years on how individuals and households can invest and manage their money well over the long haul. The advice seems particularly appropriate during these hard times.
Buffett insists that managing money well doesn't demand deep familiarity with the intricacies of finance. Instead, what matters is having a "sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework." That's good advice not only for investing household money but for dealing with many of life's complexities.
Benjamin Graham was Buffett's investing mentor and author of the 1949 masterpiece "The Intelligent Investor." Famous for his concept of investing with a "margin of safety," Graham always wanted to buy stocks for less than they were worth, and much of his book is devoted to explaining and expanding on that idea. Here's how Buffett has illustrated the basic concept: "When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing."
The same concept is also a savvy way to approach household finances. Building a margin of safety means regularly siphoning some income into savings, borrowing warily and paying off quickly any debts (most of the time). A healthy financial cushion offers shelter against downturns in the economy and life's inevitable setbacks. A margin of safety allows for pursuing opportunities whenever they come along. Financial safety and life's opportunities, like risk and return, are two sides of the same coin.
Buffett has long preached the benefits of investing for the long haul through broad-based low-fee index funds for busy individuals who don't enjoy poring over corporate balance sheets. Evidence is overwhelming that most actively traded mutual funds systematically underperform so-called passive indexed investment strategy. A major reason is the low fees attached to index funds. You aren't paying for professional managers and teams of analysts trying to beat the market. "Performance comes, performance goes," writes Buffett. "Fees never falter."
Chris Farrell is senior economics contributor, "Marketplace," and Minnesota Public Radio.
