Advice from the world’s best investor: Keep calm and avoid fees

Warren Buffett, who at 86 remains unbeatable as a long-term stock-picker, had two big messages for investors in his annual shareholders’ letter.

The letter, which gets sent to the shareholders of Buffett’s conglomerate Berkshire Hathaway, is studied by investors around the world for hints on how to replicate the so-called Sage of Omaha’s amazing returns.

Last year was no different; shares in Berkshire Hathaway – which owns household-name US businesses including insurer Geico and railroad company BNSF, as well as big chunks of Apple, Coca-Cola, Kraft Heinz, Delta Airlines among others – finished 2016 up 23.4 percent, almost double the 12 percent gain (including dividends) of the broad S&P 500 index.

Likewise, in his letter for 2016, released at the weekend, Buffett returned to two of his favourite themes: don’t fear downturns, but beware out-size fees.

Buffett, who has made an estimated fortune of $74 billion in his 52 years as a largely buy-and-hold investor, advised investors to stay calm in the face of market downturns.

“The years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks …During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted,” he wrote.

“Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”

If you identified well-priced investment opportunities as others lost their heads in times of panic, Buffett advised acting fast. Buffett said he and Berkshire Hathaway vice-chairman, 93-year-old Charlie Munger, believed dark clouds often rained gold.

“When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons,” he wrote.

Buffett continued the theme of “high and unnecessary costs” at length; he has long argued that active fund managers in aggregate would underperform amateurs who bought and held, if measured over a period of years.

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” he cautioned. “Both large and small investors should stick with low-cost index funds.”

Short-term success by a fund manager did not necessarily mean continued success over the long term, Buffett wrote, offering an telling example.

“If 1,000 managers make a market prediction at the beginning of a year, it’s very likely that the calls of at least one will be correct for nine consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet,” he wrote.

“But there would remain a difference: The lucky monkey would not find people standing in line to invest with him.”

Do you have any secrets for investment success? Are you a fan of Warren Buffett?