‘Keep it simple’: Warren Buffett and Albert Einstein believe this mantra. Here’s why your investments should too
Warren Buffett, founder and Chairman of Berkshire Hathaway, is known for the wealth of investment advice he has offered over the years. One such indicator has gained traction on social media due to its ease of adoption: Buffett’s emphasis on keeping things simple.
Similar to Albert Einstein’s belief that the ability to keep things simple is the true mark of genius (He often credits the following intelligence grid: Smart – Brilliant – Brilliant – Genius – Simple), Warren Buffett favors simplicity over flashy market tracking methods.
Why does Warren Buffett support simple, low-cost investments?
Buffett believes investing shouldn’t be complicated and one should ignore the noise and stick to the basic rules. He has repeatedly recommended low-cost index funds as the investment of choice for retail buyers over the years.
“When trillions of dollars are managed by high-paying Wall Streeters, it will often be managers, not customers, who reap the big profits. Investors both large and small should stick to low-cost index funds,” he wrote in his shareholder letter for Berkshire Hathaway’s Annual General Meeting in 2016.
The billionaire investor suggests that, as a simple bet, most investors benefit from broader market exposure and the 90/10 rule is a good way to achieve this. What is this rule? According to Warren Buffett, you should split your investment like this: Invest 90% in a low-cost S&P 500 index fund and the remaining 10% in short-term government bonds.
His advice is based on hedging: expand your market exposure rather than trying to predict tops and bottoms or having all your eggs in a few extravagant baskets.
Key takeaways from Warren Buffett’s investment advice
Buffett also often recommends investing in companies that have an “economic moat” around them, or companies with a strong competitive advantage and long-term growth prospects; and holds shares.
Speaking to CNBC in 2018, the Oracle of Omaha reasoned that the longer you hold a stock, the less risky it becomes, and that selling when your stock price drops is “a stupid thing to do.” Buffett also believes it’s imperative to ignore the noise. Rather than blindly following the market’s enthusiasm or skepticism, it is advisable to ignore the noise and make objective decisions.
In 2001, he gave students at the University of Georgia’s Terry School of Business timeless advice on seizing opportunities and measuring risk using the “20-slot punch card” method. They would be better off thinking about opportunities marked on a punch card with 20 dots on it, where “every financial decision you make consumes one point,” Buffett said.
He added that limited investment opportunities mean one spends time thinking and weighing the pros and cons rather than making hasty and impulsive decisions.
