Published on 30 April 2021

Since 1965, the world’s best known investor Warren Buffett and his firm Berkshire Hathaway have delivered a jaw-dropping 2,810,526% return for investors. Dubbed the ‘Oracle of Omaha’, this guy knows how to invest. On the eve of Berkshire’s ‘Woodstock for capitalists’ AGM, here’s five Buffett pearls of wisdom to help you invest better.

1) Cash is king

Warren Buffett likes to keep cash on hand as this enables him to spring into action when opportunities arise. In a similar vein, it also buffers the portfolio if markets tank. But this is not the 3-6 months worth of expenses you (should) have saved as a rainy-day fund; it refers to keeping some loose cash in your portfolio.

This notion was rather sweetly put in a 2011 letter to Berkshire shareholders. He recanted his grandfather remarking: “I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash . . . I hope it never happens to you”.

2) Dividends are queen

Dividends are often important to value investors like Warren. They see the discipline of paying strong dividends as a sign of a healthy company and strong finances. Like people, if you hoard cash you’re likely to waste it. But Berkshire Hathaway doesn’t pay a dividend. Instead, he likes to either to top-up investments, or use them to invest in new opportunities.

AJ Bell analyst Laith Khalaf remarks: “UK investors are in the same boat as Buffett on this one. The dividends they receive from their holdings can be reinvested in the same funds and companies that generate them, or reallocated elsewhere in the portfolio, to top up existing positions, or establish new ones. The long term benefits of rolling up dividends is clear, particularly when investing in a market as high yielding as the UK. Over the last twenty years, the FTSE All Share has returned 39% without dividends included, and 178% with dividends reinvested (we’ve written on this here).”

3) Beware the hype

One of Warren Buffett’s most famous quote offers a pithy strategy for approaching stock markets. He says: “Be fearful when others are greedy; be greedy when others are fearful”. In essence, this means don’t pile into the latest fad or highly tipped investment idea. Investing in overvalued assets is a surefire way to destroy wealth.

Likewise, look at times of market panic as buying opportunities. We wouldn’t recommend buying single stocks, as economic turmoil caused by recessions raises the risk of business failures. But active funds will have fund managers (hopefully) avoiding those for you, which means many of the fund’s investments will likely be no worse off prior to panic attacks, but potentially 20-25% cheaper.

4) Don’t over-diversify

The big man has a saying for this too: “Diversification is protection against ignorance”, adding that too much can lead you to “Diworsify”. Now, diversification is still important for us, across factors such as markets, assets, styles, and niches”, but it’s possible to have too many funds that water-down returns.

Overly diversified active funds are particularly important to avoid. You’re paying a fund manager to successfully pick winners, therefore you want them to have high conviction in each investment they make. If they don’t, and keep long lists of investments in their funds, it indicates they’re nervous of picking the wrong stocks and underperforming their benchmark. Their funds effectively become a close mirror of the index, which means you’ll end-up paying active fees for ‘closet trackers’. Weed these out in favour of index tracker funds and ETFs.

5) It’s a hell-no to cryp-to

Warren Buffett is no fan of cryptocurrencies, saying they “will come to a bad ending”, and that they are “rat poison squared”. C’mon Warren, don’t mince your words.

Khalaf remarks: “This is an extreme view, but such is the nature of investing in cryptocurrency. Extremes, both bad and good, must be counted as distinctly possible outcomes. Investors who do decide to invest in cryptocurrency should therefore only do so with a small part of their overall portfolio they are willing to lose.”