What We Can Learn From Warren Buffett

By 1966 Warren Buffett had partially purchased a textile manufacturer called Berkshire Hathaway that was losing money. Describing the investment in a letter to his partners, Buffett said, “It is well to have a diet consisting of oatmeal as well as cream puffs.”

In that letter, Buffett also warns investors that “those who believe 1965 results {a 47.2 percent gain} can be achieved with any frequency are probably attending weekly meetings of the Halley’s Comet Observers Club. We are going to have loss years and are going to have years inferior to the Dow—no doubt about it. But I continue to believe we can achieve average performance superior to the Dow in the future.”

Here is the letterhead and beginning of his January 1966 14 page letter:

And this is the beginning of the 2015 letter:

Wisdom From Warren Buffett

Since the beginning, Buffett has included nuggets of insight in his letters. Here are several from this year:

Talking about how current management can retard innovation, he said…

“If horses had controlled investment decisions, there would have been no auto industry.”

Exiting one investment too slowly, he says we should know that…

“You see a cockroach in your kitchen; as the days go by, you meet his relatives.”

He summarized the folly of short term market predictions…

“Market forecasters will fill your ear but will never fill your wallet.”

And explains why Wall Street seldom recommends buy and hold…

“Don’t ask the barber whether you need a haircut.”

He told why he likes how you get money in the insurance business…

“Simply put, insurance is the sale of promises.”

And he quotes Yogi Berra…

“Every Napoleon meets his Watergate.”

And investment guru Ben Graham…

“In the short-term the market is a voting machine; in the long-run it acts as as a weighing machine.”

And IBM’s Tom Watson, Sr. to show what a CEO should know ….

“I’m no genius, but I’m smart in spots and I stay around those spots.”

And finally, he cites the ABCs of businesses decay…

“Arrogance, Bureaucracy and Complacency”

Our Bottom Line: Investing Advice

In his 2013 Shareholders Letter, Warren Buffett gave some “when I die” investing advice. Referring to his wife, but really to all of us, he said the trustee overseeing her money should, “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions or individuals—who employ high-fee managers.”

Mr. Buffett’s wisdom is all about avoiding probability neglect. Seeing the S&P or Dow skid downward, typical investors respond emotionally and sell. They ignore the probability—a statistical reality—that markets in the long run have provided consistent returns. By compelling the Trustee to remain in the index fund, he is precluding the possibility of probability neglect when the market plunges.