Financial Advice From Warren Buffett's Shareholder Letters

Veterinarians hoping to start or amp up their investment portfolios might want to heed Warren Buffet’s popular advice: “Risk comes from not knowing what you're doing.”

However, a lack of current financial wisdom shouldn’t deter you from the advantages of investing. Instead, expanding your knowledge will lay the groundwork for a strong financial portfolio in the future.

Buffett, who is often regarded as one of the most successful investors of all time, uses his annual letter to Berkshire Hathaway shareholders to highlight some of the strategies that define his approach to investing. The letters, which date back to 1977 and regularly surpass 15 pages, are a treasure trove of personal finance and investment knowledge.

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At the heart of Buffett’s investing style is long-term planning. If you can’t predict what an industry will look like in 10 to 20 years, don’t invest your money. It didn’t take a genius to see that airlines, banks, and automobiles had a bright future, Buffett said, but few investors were sharp enough to pick the companies that would survive the competition in those industries.

Among the standouts in the collection of Buffet’s letters are these investment guidelines:

• Recognize Risk: The best way to approach the stock market is to take a practical look at the associated risks. Stocks are vulnerable to steep drops, but in the long run tend to be less risky than other types of investments. Because of the short-term risk, however, stocks are not the best choice if you’re going to need a quick return. If you know you’ll need money for college tuition or a down payment on a new veterinary office in the next 5 years, you should be investing in bonds or money market funds. With a longer timeline, you’ll want to put money into equities, which have a better track record of gains over greater periods.

• Zero in on Costs: Whether you’re trading individual stocks through a broker or a mutual fund manager is doing the trading for you, transaction costs can eat up your returns. Even at the bargain-basement commissions online brokers offer, the cost of stock trades cuts into any profits you may make and adds to your losses if stocks decline. With mutual funds, it makes sense to look for funds with low expense ratios. Low-cost funds have been shown to beat their higher-cost counterparts by about 2% a year over the long term, which is close to the difference between their expense ratios.

• Use Unease: Buffett believes a climate of fear is an investor’s best friend. His advice: buy when everyone else is selling and resist when everyone is buying. Besides, if you hold off on buying when everyone else is, you’ll have the extra cash to invest when stocks are falling.

• Seek Value: Buffett’s value-oriented approach advises investors to look for stocks that not only offer good growth prospects, but provide them at a steep discount. According to Buffett, the current price of a stock is rarely a trustworthy indicator of how much it’s actually worth. Over time, however, a stock’s price will come to reflect its true value and a stock that’s underpriced will eventually rise.

• Be Diversified: Diversifying your portfolio reduces risk. To get true diversification, you might want to look for a fund that covers a wide array of stocks, from small-cap to large-cap and everything in between. Add a bond index fund and an international index fund to your portfolio and you’ll achieve a level of diversification that will help you weather Wall Street’s storms.

Greg Kelly is a long-time health care writer and editor. He has written for the Physician’s Money DigestTM, Dentist’s Money DigestTM and Veterinarian’s Money DigestTM websites. He lives at the Jersey Shore and welcomes comments at gregkelly@monmouthbeachlife.com.