Warren Buffett’s Investing Advice for the Average Investor

If you’re like me, you’re no expert when it comes to investing money. I understand the importance of saving money (rainy day funds, college funds for children, retirement funds, etc.), but when it comes to making that money grow — both to keep up with inflation and to earn a little extra, if I can — it can feel like a daunting task.

And with the stock market down this year, and with wild swings in gains and losses over the past few weeks, it’s tough to want to have any money invested in the market, as we’re seeing our hard-earned money that we’ve been putting aside go down in value.

While it’s during times like these that we should remind ourselves of the adage “this too shall pass”, it’s also worth pointing out some practical advice from one of the greatest investors of our generation.

Warren Buffett has a very impressive record when it comes to investing. He has generated huge returns on his investments over the years, which span over six decades. And recently he has provided some basic advice for the non-professional, average investors like ourselves. I pulled out two quotes from him, which are responses to two separate Question-and-Answer sessions conducted earlier this year.

The first one is from a Fortune Magazine article that reported on a Q&A session with a business school class (“What Warren thinks…”, April, 2008):

Question: “What advice would you give to someone who is not a professional investor? Where should they put their money?”

Answer from Buffett: “Well, if they’re not going to be an active investor – and very few should try to do that – then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They’re not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don’t buy all at one time.”

The other quote (pulled from Outstanding Investor Digest, August 31, 2008) comes from Buffett’s annual meeting for Berkshire Hathaway:

The question from a shareholder is about what advice he would give to someone who has a full-time job and can’t devote much time to investing.

Answer from Buffett: “Well, I’d be very simple…I’d probably have it all in a very low-cost index stock fund. It might be Vanguard — somebody I knew was reliable and where the cost was low. And because you postulated that you’re not going to become a professional investor, I’d recognize the fact that I’m an amateur investor.

“And I’d feel that — unless I bought during a strong bull market which this hasn’t been — I would outperform bonds to a degree over a long period of time. And then I’d forget it and go back to work. Charlie?”

Response from Charlie Munger, long-time partner of Buffett’s and Vice Chairman of Buffett’s Berkshire Hathaway: “If you don’t have any real prospects for being a very skilled professional investor, of course you should compromise on some simple thing like an index fund.”

And Buffett’s follow up response: “And you won’t get that advice from anybody, because nobody gets paid to give you that advice. So you’ll have all kinds of people telling you how much better they can do for you than that — and how if you just give them a wrap fee or commission or whatever it may be, they’ll do better. But they won’t do better.

“You will get a perfectly decent return over a 30 or 40 year period by doing what I suggest. And in the end, why should you expect more than that if you don’t bring anything to the party? Salesmen will tell you that you’ll get more — but you won’t…”

And here’s a website that takes its name from a Warren Buffett saying and follows Buffett and other value investors: WaitForYourPitch.com