Your Money : Manage Your Money Yourself, Buffett Advises : Investing: This is one field where laymen can do better than professionals, the famed investor says.
Investors are better off managing their own money than turning it over to professionals, according to Warren Buffett, famed investor and chairman of Berkshire Hathaway Inc.
At a time when individual investors have about $2.1 trillion in mutual funds, Buffett’s opinion may fall into the minority. Still, investors who do their homework and limit their holdings to companies and industries they understand will come out ahead, he said.
“The professional in almost any field achieves a result which is significantly above what the layman in aggregate achieves. It’s not true in money management,” Buffett told a recent gathering of members of the New York Society of Securities Analysts.
Professionals are handling a growing share of investments by individuals, and, as a result, their returns increasingly mirror the overall market’s return. “By definition, money managers as a group are going to end up with average results,” Buffett said.
The 64-year-old native of Omaha, who has net worth of more than $9 billion and last year was named the richest American by Forbes magazine, said that when it comes to investing, bigger isn’t better.
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Buffett suggests owning lots of shares in a limited number of companies, rather than keeping small holdings in numerous companies.
“If you really analyze businesses, so you are buying into a business and making a conscious decision about what you think the future of that business is, I really think that if you can find six or eight (companies), then that’s plenty,” he said.
The core of Buffett’s portfolio consists of stocks he has held for many years: Coca-Cola Co. (his largest holding), Gillette Co., Washington Post Co., Capital Cities/ABC Inc., Wells Fargo & Co. and Geico Corp.
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If, on the other hand, an investor’s only strategy is to hold equities over time and count on some appreciation, you probably ought to own at least 20 stocks, Buffett said.
“The less you know, the more you have to own,” he said. “Diversification is a protection against mistakes or ignorance.”
Buffett hasn’t avoided all the bumps in the road. He looked like any mortal investor last month when Berkshire Hathaway filed documents with the Securities and Exchange Commission saying it may write down the value of its investment in USAir Group Inc. this year--if the airline doesn’t implement a cost-cutting program.
Berkshire holds 358,000 shares, or about 0.6%, of USAir.
“It was a mistake,” he said of his investment in the Arlington, Va.-based airline, which has been dogged by fare wars and disruptions caused by crashes in Charlotte, N.C., and Pittsburgh. “We’ll see how it comes out.”
Buffett spoke at the NYSSA meeting commemorating the life and work of Benjamin Graham, who is considered the father of value investing.
Value investors select securities by focusing on a company’s financial condition and its future earnings potential. They typically ignore price cycles of individual stocks or movements of the market as a whole. Buffett studied under Graham at Columbia University.
“We just try to buy businesses with good to superb underlying economics, run by honest and able people, and buy them at sensible prices,” Buffett said. “That’s all I’m trying to do.”
Buffett likens himself to a college basketball coach, charged with the task of finding “seven-foot” sectors to use as the foundation for his investments. Investments, like a basketball dynasty, must be built around a strong center, he said.
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When “I see a seven-footer, I think, ‘Is the guy coordinated, can I keep him in school, and all those things,’ ” he said.
“And then some guy comes up to me and says, ‘I’m 5-6, but you ought to see me handle the ball,’ ” Buffett said.
His response? “I’m not interested.”
