7 July 2014

Why invest over the longer term?

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The image of somebody who makes money from stocks and shares could be frenetic and impatient and there might be some red braces and big pinstripes in there.

Yet the most famous and successful investor of the last 50 years really doesn’t fit this stereotype at all. Popularly known as the “Oracle of Omaha” for the Nebraskan town where he grew up and still lives, Warren Buffett dresses more like an old-school gent than a trading-floor bellower, he drives an ageing Cadillac and still lives in the house he bought for just over $31,000 back in the 1950s. It’s not the image you’d expect from a man whose investment company Berkshire Hathaway has delivered its shareholders an annual return of 21% for the past 50 years, and made many of them millionaires several times over. But then the biggest difference between Buffett and many other investors isn’t the way he spends money but the way he invests it. And this quote of his gets to the heart of that difference.

Warren Buffett’s investment strategy is a simple one. In a recent article, The Economist described it this way: “seek solid firms with good defenses against competitors, leave their managers to run them as before, and hang on to them for the long term.” And it’s delivered superb results. An investor who bought one Berkshire Hathaway share at just over $11 in 1964 could have sold it for $190,000 earlier this year. The conventional wisdom is that individuals can’t outperform stock markets year after year. But Buffett’s philosophy of finding companies that you can believe in, and then investing in them for the long term has helped him to beat the stock-market over the long term.

Please note that past performance is not a guide to future performance.

So if you didn’t happen to buy that Berkshire Hathaway share in the 1960s and you haven’t got Warren Buffett available to manage your investments for you, how can you apply these words of wisdom to your money?

Two lessons from Buffett:

The first lesson is the importance of long-term investing. Historically, anybody holding onto investments for six years or more has significantly increased the chance of their shares being worth more than when they started  Hold onto shares for even longer, and your chances improve further still.

The other lesson involves choices about how your investments are managed. Warren Buffett’s quote implies you should be careful about individuals who promise to beat the market time and time again through magic formulas. His own success has come through having a strong, clear philosophy and sticking to it.

These lessons were learned by Portfolio Financial Consultancy Ltd a long time ago, and lie at the core of our investment philosophy.  Whilst not able to boast of the stellar returns Mr Buffett has consistently achieved, we are able to mix together different types of funds and strategies to help reflect the approach to investing that individual clients want to take.