Editor's note: Janet Lowe interviewed Warren Buffett for her book The Triumph of Value Investing: Smart-Money Tactics for the Postrecession Era, which appears this month.
Warren Buffett, among the richest men in the world, created his $47 billion fortune from scratch using a method called "value investing." This concept, he explains, is more than just a way to crunch numbers. It is about seeking out underpriced enterprises that have strong fundamental worth and using investments in them to create something that is of even greater value to society.
After the 2007-2008 financial crisis, Buffett wrote in an op-ed piece in the New York Times that for his personal account, he would be buying U.S. securities. Even though the economy had tough times ahead, he wrote, he still had long-term faith in the American economy and believed that American capitalism can and will continue to produce value.
"To be sure," he wrote, "investors are right to be wary of highly-leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now."
Emphasizing that investors should look to the future rather than the past, he quoted ice hockey pro Wayne Gretzky: "I skate to where the puck is going to be, not to where it has been."
Buffett had some more words of advice for the everyday investor. (Read an excerpt from The Triumph of Value Investing.)
Q. You often stress the importance of investors having the right attitude. What do you mean by that?
A. We have new times and new products, but it gets back to this: The market is there to serve you and not to instruct you. Chapter 8 of The Intelligent Investor [by Buffett's late mentor Benjamin Graham] says it all. It's not about having great skills, not about knowing calculus. It's about an attitude that is fundamentally sound. It doesn't require a master's degree, but just settling into investments.
When people start out with investing they should take a class on how to buy a farm. Buying a farm is just like buying stocks. What is the worth of the property; how does that compare to other farms? Most important, what will the farm produce over time? It is the farm's earning power that brings the return. Go through the whole thing logically.
Q. What lessons should investors learn from the financial meltdown of 2007-2008?
A. They are age-old lessons; they aren't new lessons. They are things we all knew that many people forgot when they were euphoric. Leverage was rampant. Just about the only way a smart person can go broke is to borrow money. There is nothing more fun than leverage on the way up, nothing more deadly than leverage on the way down. If you're smart, you don't need debt, and if you're not, you shouldn't use it.
Q. Is long-term investing obsolete?
A. No. If you owned a group of good companies a few years ago, you were fine years ago and you're fine now. Don't let your investment decisions be ruined by the collective errors of others.
Q. Many investors are turning to gold as a safe haven. What do you think of that strategy?
A. Gold is not an investment; it is a refuge and will be less important over time. You can say gold is an asset like art is, but something that doesn't produce anything is not an investment. Stamps are assets. A farm is an investment. You can speculate in an asset class if you want to, but you're only betting against others. As long as the next guy wants to buy it, it's fine.
Q. What is the safest, simplest and lowest-cost way to invest in stocks?
A. An index fund is what I recommend for people generally. If you want to own in the oil industry, for example, there is an exchange-traded fund that makes it easy for you to do it. I wouldn't do that myself, but the small investor should buy index funds over time. It is a low-cost way of being in the market over time, especially if you don't want to do the work of managing investments. This way you avoid the wrong time to pick stocks. The big danger [for investors] is doing the wrong thing; if you don't do the wrong thing, you will do something reasonably right.
Q. What is the best investment advice we can give our children and grandchildren?
A. Invest in yourself, your education and your earning capability so that you will be able to claim your share of the national economic pie, regardless of inflation. Your money can be inflated away but your talent cannot.
Janet Lowe is the author of the book The Triumph of Value Investing: Smart-Money Tactics for the Postrecession Era.
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