Advice from Warren Buffett Circa 1975

“Much of Wall Street is a succession of fashions. But fashion-hitting never has been successfully maintained, to my knowledge.” – Warren Buffett

Warren Buffett’s advice is worth listening to not just because he is one of the richest men in the world and the greatest investor of all-time. These reasons do carry weight, but the fact that his advice is so timeless and not context or scenario specific means that his words can continue to help you over the long-term.

Fortune magazine recently released a letter that Buffett wrote to Katherine Graham of the Washington Post outlining his thoughts on how the Post should manage their pension investments. The letter was written in 1975, yet his advice still rings true to this day.

I went through the letter and picked out some of the best advice that Buffett gave that can be applied to investors in today’s markets.

Here’s what Buffett had to say on Wall Street’s chances of outperforming the market:

A little thought, of course, would convince anyone that the composite area of professionally managed money can’t perform above average. It simply is too large a portion of the entire investment universe. Estimates are now that about 70% of stock market trading is accounted for by professionally managed money. Any thought that 70% of the environment is going to substantially out-perform the total environment is analogous to the fellow sitting down with his friends at the poker table and announcing: “Well, fellows, if we all play carefully tonight, we all should be able to win a little.” 

The implication here is that you either need to have a unique process that is independent from Wall Street’s ways or you will be better served taking the average of the market’s results (index funds).

Many investors spend far too much time seeking out the hottest performing mutual fund, asset class, sector or stock with no real strategy to speak of. This line of thinking doesn’t take into account the blurred lines between skill and luck when looking at recent returns.

Here Buffett discusses using past performance as a measurement technique for choosing investment managers or active funds:

If above-average performance is their yardstick, the vast majority of investment managers will fail. Will a few succeed – due to either chance or skill? Of course. For some intermediate period of years a few are bound to look better than average due to chance – just as would be the case if 1,000 “coin managers” engaged in a coin flipping contest. There would be some winners over a 5 or 10-flip measurement cycle.

[…]I do not believe they can be identified solely by a study of their past record.

Having the ability to detach himself from the crowd and ignore short-term noise in the markets is one of the reasons Warren is the world’s greatest investor. He has a knack for being able to stay calm and collected when those around him are losing their heads and succumbing to herd mentality.

Thinking in terms of businesses over the long-term instead of stocks over the short-term has seved him well. Here’s how Buffett describes the stock market:

Finally, it rests on a belief, which both seems logical and which has been borne out historically in securities markets, that intrinsic business value is the eventual prime determinant of stock prices. In the words of my former boss: “In the short run the market is a voting machine, but in the long run it is a weighing machine.”

Source: Fortune

What's been said:

Discussions found on the web
  1. Martin commented on Sep 02

    Buffett really has the wisdom. I learned the hard way some of his advice myself. The hardest is to stay calm and even be buying when all around are panicking ans selling. But since I have been doing this I could start seeing fruitful results of this approach. Great post. It’s nice to read about Warren and his wisdom.

    • Ben commented on Sep 02

      Thanks Martin. I’ve read plenty of books and articles about Buffett but every time I read something new I get something out of it. It’s great that he’s decided to share his wisdom over the years. Following his advice is much harder than it sounds, though, for most.