Editor’s note: This article was first published in January 2015, and its advice is framed for that year. The remark that Japan’s stock market is an exception to long-term index gains reflects that time; the Nikkei 225 only passed its 1989 peak in 2024.
Warren Buffett is sticking to his usual line. We have already published a whole series of this legendary investor’s investment guidelines, but I think his advice for 2015, as collected by GoBankingRates, can be summed up in just three tips.
First of all, Buffett still advises you to forget about looking for that magic formula to get rich overnight, because not even the smartest investors have found it. “And believe me, there are investors much smarter than you,” Buffett says.
That is why his advice stays along the same lines: wealth is built slowly and steadily by doing a “few” things well and avoiding doing many others badly.
1. Put your money in an index fund.
Although Buffett recommends putting your money in an index fund tied to the S&P 500, it is probably a good idea to do so with most indices, since history has shown that in the long run, with a few exceptions, indices go up (the Japanese market is an exception here).
Putting your money into a fund like this may be boring, but, as has been said many times, the kind of investing that makes money is usually boring.
Index funds are passively managed and, as a general rule, have proven more profitable than actively managed funds, partly because they are cheap.
But remember that investing in an index fund must always be done with a long-term mindset, because any index could crash tomorrow. That would be the ideal moment to apply a DCA investment strategy, which takes real investing self-discipline.
See also: This is the skill that made Mark Cuban a millionaire, and the one you need to succeed
2. When share prices fall, you buy; you don’t sell.
We are assuming that you have chosen solid stocks in stable industries (or the index itself). When prices fall, many investors tend to sell at a loss instead of taking the chance to buy more shares at lower prices, shares that will rise again in the long run.
Buffett says he loves bear markets, and the further the prices of his stocks fall, the more he likes it, because it means he can buy what he wants to buy more cheaply.
Even so, at the risk of repeating myself, you should only invest in companies whose business model you fully understand, and never invest solely on the advice of an adviser or banker.
Buffett doesn’t know whether the market will go up or down next week either, but he is clear that in the long run the market will rise. That is the premise to start from.
3. Learn to save.
For Buffett, the most important thing is to save early so you can put that money to work in investments as soon as possible and let compound interest do its job. He believes that this is exactly where most people fail. Saving is a habit, and it is a winning habit in investing, just as the pursuit of quick riches is usually a losing one.
The rest of his advice is a bit simpler. Buffett maintains his view on Bitcoin, saying it is a mirage, and so he advises staying as far away as possible from this “currency”.
He also advises you to learn to read companies’ financial statements this year, because that is where real investment knowledge lies. And he urges you to stop trying to become an expert: if you are clear that your investing is for the long term and you manage to pick a few stocks to hold for the long term, that is all you need to build wealth (over the long term). Keep things simple, because in the stock market the money is in the simplest method.
Further reading
- 8 books Warren Buffett thinks everyone should read
- 8 life lessons from Warren Buffett
- How Buffett analyses stocks before investing in them, in depth
Featured image: shankar s., CC BY 2.0, via Flickr.
