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Bonds vs. Stocks: Why Buffett Says Your 'Safe' Investments Might Be Your Riskiest

By sagebytes —

Warren Buffett's Investment Best Practices

Lessons from Berkshire Hathaway's 2017 Annual Letter

Core Investment Principles

1. Focus on Long-Term Value

  • View stocks as ownership interests in businesses, not as ticker symbols or trading opportunities
  • Expect that successful businesses will yield successful investments over time
  • Remember Ben Graham's maxim: "In the short run, the market is a voting machine; in the long run, it becomes a weighing machine"

2. Avoid Debt When Investing in Stocks

  • Never use borrowed money to own stocks
  • Market declines can be steep and unpredictable (Berkshire has experienced four major dips between 40-60%)
  • An unsettled mind during market downturns will not make good decisions
  • Major market declines offer extraordinary opportunities to those not handicapped by debt

3. Adopt a Rational Approach to Risk

  • True investment risk is the possibility that your purchasing power won't increase over time
  • For long-term investors, high-grade bonds often increase risk rather than reduce it
  • As investment horizons lengthen, a diversified portfolio of U.S. equities becomes less risky than bonds
  • It's a mistake for long-term investors (pension funds, endowments, individuals) to measure risk by their ratio of bonds to stocks

4. Set Intelligent Purchase Criteria Buffett's acquisition criteria:

  • Durable competitive strengths
  • Able and high-grade management
  • Good returns on net tangible assets
  • Opportunities for internal growth at attractive returns
  • A sensible purchase price

5. Exercise Patience and Discipline

  • Be willing to wait for appropriate opportunities
  • "The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own"
  • Overpaying destroys value, even for excellent businesses
  • Having cash reserves provides optionality for future opportunities

6. Minimize Activity and Transaction Costs

  • Focus on big, "easy" decisions and avoid excessive activity
  • Stick with a sensibly constructed portfolio for the long term
  • Simple investment strategies often outperform complex ones
  • Costs and fees can significantly erode returns

7. Remain Calm Through Market Volatility

  • Market fluctuations will occur regularly and substantially
  • Short-term price movements are often random and disconnected from underlying value
  • Keep your head when others are losing theirs (Kipling's "If")
  • Seize opportunities during market panics without requiring great intelligence

8. Be Wary of Financial Industry Incentives

  • Advisors often earn substantial fees regardless of performance
  • Wall Street's incentives may not align with investors' goals
  • Forecasts that justify purchases are never in short supply
  • "Don't ask the barber whether you need a haircut"

The Buffett Mindset

"Charlie and I have never focused on the calendar. We own a collection of businesses that we think will do fine over time, and we don't buy and sell based on short-term prospects."

Remember: The goal is to make "sensible investments at sensible prices" for the long term.