This year, excerpts of the Warren Buffett annual letter to shareholders have been published in Fortune. In the letter, Warren Buffett recalls his purchase of a Nebraska farm in 1986, in the wake of a real estate bubble collapse. Almost three decades later, Warren Buffett notes that the farm makes three times as much as it did back then and is worth five times the original purchase price. In that time, Warren Buffett notes he has only visited the farm twice.
The story of the farm and another real estate investment makes clear that investors can reap solid returns even it they aren’t an expert in the business the invest in, Warren Buffett notes. He advises investors to shun “quick profits” and “keep things simple.”
Warren Buffet notes that when he and Charlie Munger purchase stocks, they use the same analysis as when considering the acquisition of the entire business — whether they can “sensibly estimate an earnings range for five years out or more.”
According to Warren Buffett, investors should “own a cross section of businesses that in aggregate are bound to do well,” as opposed to trying to pick individual winning stocks.” He recommends a “low-cost S&P 500 index fund” as one way to attain that objective.
Warren Buffett says that investors should concentrate on the future productivity of any asset. If that can’t be calculated, investors should “move on.” Warren Buffett concedes that he can’t “speculate sucessfully” and says he remains skeptical of sustained success in speculation.