I recently finished teaching a new MBA coursetitled, The Wisdom of Warren Buffett, which wasa novel and exciting experience. You're probablywondering why I call it a "novel"experience.Don't conservatories routinely teach the music of Bach,Mozart, and Beethoven with reverence and enthusiasm?Yes, they do. But most business schools wouldjust as soon not even acknowledge Buffett's existence.They have about as much respect for his financial wisdomas they do for the wisdom of lottery winners.
Unsung Investment Hero
It is difficult to claim that someone who has growna $1000 initial stake into a holding that routinely landshim among the world's top five richest people and whois almost certainly the greatest investor of all time, justgot lucky or is merely an anomaly. But that's what mostacademics in finance and economics like to claim—implicitly if not explicitly.
Why this attitude? It's because Buffett's investmentapproach and enormous success comes uncomfortablyclose to revealing that the efficient market theory,which is the pride and joy of the academic community,may be nothing more than a house of cards. If yourcareer is built on adding cards to that house, a housethat can come tumbling down at any time, you wouldnot feel too enthusiastic about Buffett either.
All that aside, what investment lessons can welearn from studying the life and wisdom of this livinglegend? It would take more than one column to coverthe key lessons that all investors should be familiarwith. So, let me start here with the one I consider tobe the most important: Know thyself.
After immersing myself in the writings of andabout Warren Buffett for several months, I came awaywith the conclusion that the most important lesson isto decide up front what kind of investor you are orwant to be and resolve to invest accordingly. We canparaphrase Socrates to sum up this lesson as,"Investor, know thyself."
Gold and Green Rules
What does that mean? According to Buffett, if youare or plan to be a know-nothing investor (a descriptive,not a derogatory, term), then you should investmost of your stock market money in low-cost, broad-basedindex funds. Spread out your investments overtime, using something like dollar cost averaging to goin, and hold them for the long run. Don't jump in andout to avoid possible downturns or to take advantageof possible upturns.
The big difference:
This does not sound different from what you haveheard thousands of times or what almost all academicswill tell you. Buffett is notsaying that this is the best way to invest, which iswhat most academics do. These same academics willtell you this is the only possible rational way to invest.
Buffett would not dream of investing this wayhimself. His point is that if you do not have the aptitude,interest, or the huge amount of time it takes tolearn and invest the right way, you should not wasteyour time and money trying to pick stocks and activelymanaged mutual funds in your spare time.
By Buffett's measures, most investors are know-nothinginvestors. They know very little about investingand have very little true interest in learning aboutinvesting. They mistakenly equate their interest inmaking money with an interest in investing. But theyare not willing to admit that, even to themselves. Andso they are not willing to follow his prescription forknow-nothing investors. This lesson may not soundlike much, but it is probably worth a few hundredthousand to a few million dollars over a lifetime.
author of The Only Proven
Road to Investment Success (John Wiley; 2001)
and Financial Modeling Using Excel and VBA
(John Wiley; 2004), currently teaches finance at
the Fordham University Graduate School of
Business and consults with individuals on financial
planning and investment management. He welcomes
questions or comments at firstname.lastname@example.org.