There will never be such a thing as the single best investment advice for an investor, because opinions vary widely. Still, our selection of 16 investment tips from Warren Buffett must surely include the most valid and wise advice, given the legend it comes from.
This time it is Paul Merriman, founder of Merriman Wealth Management, who has devoted his whole life to advising investors, teaching people of all ages to get the most out of their investments with an eye on retirement.
Merriman has obviously received every kind of investment advice, and in his column on MarketWatch.com he tries to settle which might be the best investment advice. As we will see, it is not just one piece of advice.
Warren Buffett’s guideline, made up of 2 rules
- Rule No. 1: Never lose money.
- Rule No. 2: Never forget rule No. 1.
Merriman says he got a somewhat better-explained version of this advice from Richard Russell:
“It may sound naive, but believe me, it isn’t. If you want to build wealth, you cannot lose money in foolish, absurd ways. Most people lose money on disastrous investments, gambling, bad business deals, poor stock market timing, options and futures, real estate, bad debts and their own businesses.”
That is why I will always say that you don’t go into the stock market to try your luck, but to make money. You have to take risks, but you have to control those risks.
Two pieces of advice from Ben Franklin
- An investment in knowledge pays the best interest.
- Beware of little expenses; a small leak will sink a great ship.
John Bogle’s advice
Why look for a needle in a haystack when you can buy the whole haystack?
What Bogle meant is that instead of investing in individual stocks, you should buy index funds. I don’t agree with this at all given the way I invest, but for other people it could be a good long-term investment idea, on the premise that indexes always go up in the long run, except for the Japanese index, which seems to be under some kind of curse.
But there is another piece of advice that, simple as it is, I am not sure how well people understand:
“Don’t invest in what you don’t understand”
Many people invest thinking they know what they are investing in, but they really don’t. That is what happened to many real estate investors who thought they knew the basic principle of property: “Houses and land always go up.” They learned their lesson.
If we invest in fixed income, I think anyone can understand a fixed-term deposit or bonds. But when we talk about a slightly more complex investment, such as an investment fund, are you really sure you know what you are doing?
This kind of product is often dressed up in many ways, with all sorts of names and adjectives. For example, a fund might be called “Guaranteed 15% Investment Fund”. For some reason, everyone takes this to mean they are guaranteed a 15% return at maturity. And that is not the case.
Understanding the type of investment means understanding the costs it involves and the possible scenarios that could play out, so you can decide whether it really is the kind of investment you want to make.
But the best investment advice, for Merriman, comes from his partner and friend:
“Make your investment decisions by analysing them as if they were the most important thing in your life, but never forget for a moment that your investments are only a means to what really matters.”
Tailor your portfolio diversification to your age, education, income level and risk profile. What is good for some people can be terrible for others.
And finally, Merriman’s own advice:
“Never take an investment risk that is not rewarded by the long-term return.”
He says that ever since he heard it in 1994, this advice has always guided his investment decisions.
To apply it, we need to look at an investment product’s standard deviation and its return on investment. Standard deviation is a statistical measure of volatility, and therefore of risk. The higher the number, the greater the risk.
For example, the S&P 500 index has returned 11% a year with a standard deviation of 15.5%, while a Barclays bond index had a standard deviation of 2.9% and a return of 7.7%.
In short, the S&P was the more profitable investment, but bond investors took on practically no risk while still earning a lower return. And that is what you need to analyse: is the extra risk worth it for you? As you know, the higher the risk, the higher the return. Even so, many investors take on enormous risk in investments that bring them practically no profit.
Without wanting to be “twisted” about it, we should never forget that past results are no guarantee of future results.
All in all, a good selection of advice to keep in mind.
Further reading
- Investing: it’s not about what you buy, it’s about what you pay for it
- The pyramid of financial success, after Maslow
Featured image: DimiTalen, CC0 1.0, via Wikimedia Commons.
