‘Keep it simple': Warren Buffett and Albert Einstein believe this mantra. Here's why your investments should too
Berkshire Hathaway founder and Chairman, Warren Buffett is known for his wealth of investment advice over the years. One such pointer has gained traction on social media for its ease in adoption — Buffett’s emphasis on keeping things simple.
Similar to Albert Einsteins belief that the ability that keeping things simpler is the true mark of genius (He often credited for the following intellect chart: Smart — Intelligent — Brilliant — Genius — Simple), Warren Buffett too endorses simplicity over fancy market tracking methods.
Why Warren Buffett backs simple and low-cost investments
Buffett believes that investing should not be complicated, and one should stick to the fundamental rules while ignoring the noise that comes. Over the years he has repeatedly suggested low-cost index funds as the investment of choice for retail buyers.
“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds,” he wrote in the shareholder letter for Berkshire Hathaway Annual General Meeting in 2016.
As a straightforward bet, the billionaire investor suggests that most investors benefit from broader market exposure and the 90/10 rule is a good way to achieve this. What is this rule? According to Warren Buffett, you should divide your investment as follows: Put 90% into low-cost S&P 500 index fund, and the remaining 10% in short-term government bonds.
His advice boils down to risk protection — broaden your market exposure, instead of trying to predict the peaks and troughs, or concentrating all your eggs in a few hyped baskets.
Key takeaways from Warren Buffett’s investment advice
Buffett also often suggests investing in companies which have an “economic moat” around them or companies with a strong competitive advantage and growth prospects in the long run; and holding on to the stocks.
Speaking to CNBC in 2018, the Oracle of Omaha reasoned that the longer you hold a stock, the less risky it becomes, and that selling is a “dumb thing” to do when your stock price drops. Ignoring the noise is also imperative, believes Buffett. Instead of blindly following the market’s euphoria or scepticism, making objective decisions while ignoring the noise is advisable.
In 2001, he gave students at the University of Georgia’s Terry College of Business some evergreen advice on seizing opportunities and measuring risk using the “20-slot punch card” method. Buffett said they would be better off thinking of opportunities marked on a punch card with 20 punches on it, where “every financial decision you made, you used up a punch”.
He added that limited chances to invest mean that one would spend time thinking and weighing the pros and cons, instead of making rash and impulsive decisions.