Warren Buffett: Don't bet the farm; keep investments diversified

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Warren Buffett, co-chair of the 10,000 Small Businesses Advisory Council, takes part in a panel discussion following a news conference announcing a $20 million partnership to bring Goldman Sachs' 10,000 Small Businesses initiative to the city of Detroit, Michigan November 26, 2013. Berkshire Hathaway chairman Warren Buffett, known for his folksy straightforward communication style, turned to farming to recommend his winning strategy for investors to follow.

In an excerpt of his annual letter to shareholders published online by Fortune on Monday, Buffett used a 1986 purchase of a farm located 50 miles north of Omaha to support his case about simple, diversified and low-cost investing.

He had bought the farm because he could weigh how much the property would yield in corn and soybeans against its operating costs - and not to speculate on the value of the land or to sell it as soon as prices rose.

"Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid," Buffett wrote in his annual letter to shareholders, adding that he has visited the property only twice.

"So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm."

Buffett's advice reflected, as well, his bias toward holding assets for the long term. Rather than a constant flux of buying and selling, Buffett said investors should treat daily price changes as background noise, to be ignored in pursuit of a greater objective.

"The goal of the nonprofessional should not be to pick winners - neither he nor his 'helpers' can do that - but should rather be to own a cross section of businesses that in aggregate are bound to do well," he wrote.

For nonprofessionals, such as mom-and-pop investors saving for retirement, Buffett recommended a low-cost S&P 500 index fund, particularly highlighting Vanguard's. That mutual fund has a net expense ratio of 0.17 percent.

Buffett - ranked the world's fourth-richest person by Forbes magazine, with a fortune of $53.5 billion - also dismissed much of the market- and economy-watching that informs daily price fluctuations and, often, future price speculation.

"Forming macro opinions or listening to the macro or market predictions of others is a waste of time," wrote the man dubbed "the Oracle of Omaha" because of his performance in the markets.

Investors should instead focus on the future productivity of assets, rather than speculating on price movements, which Buffett said that he was unable to do successfully.

"Games are won by players who focus on the playing field - not by those whose eyes are glued to the scoreboard."

Berkshire Hathaway is expected to report its 2013 earnings on Saturday.


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