Warren E. Buffett says that his financial life, his thoughts about investing, changed profoundly when he purchased Graham’s book in 1949. Graham’s ideas, he writes, “were explained logically in elegant, easy-to-understand prose,” and those same qualities are to be found in Buffett’s recent letter to the shareholders of Berkshire Hathaway Inc. You may not want to curl up in bed with it like a good novel, but you’d definitely be smart to sit up and pay attention (and likely get considerable investment wisdom out of it). We were particularly struck us by what Buffett describes as “certain fundamentals of investing,” including the following:
* “You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
* “Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
* “If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.”