The Globe and Mail, Report on Business
Published July 7, 2007

Avner Mandelman's column in this space last Saturday featured the investment philosophy of Warren Buffett. If you've been reading this column or my blog, it's obvious that I also follow Mr. Buffett (at 76 years of age, he still has it).

Whether you're in the investment business or not, his healthy dose of common sense and "tell it like is" makes for good reading.

The investment management industry is full of worshippers of Mr. Buffett and there is always a contingent of Bay Streeters that go to Omaha for the annual pilgrimage. I've only done it once, but I found it to be a mind-blower. I'd never have thought I could sit in an arena with 16,000 other people and listen to two senior citizens answer questions for five hours (Charlie Munger, Mr. Buffett's sidekick, is 83). I found it captivating. Go figure.

What I find just as mind blowing is the fact that so few investment professionals actually apply any of the common sense of Mr. Buffett and Mr. Munger. I don't mean to imply that everyone should pick stocks on the same basis, but the dynamic duo live by some principles that apply to all types of investing.

To understand why more investment professionals don't follow these principles, put yourself in their shoes for a day.

Imagine it's the Monday morning after your sojourn to the Berkshire Hathaway annual meeting. You have taken copious notes and have come home with some ideas on how you might change your fund. By the time you arrive at the office, however, you've read two or three newspapers and your head is full of current news. As soon as you settle in at your desk, the phone starts ringing with the story of the day. At 9, you meet with the rest of the investment team to talk strategy. Many of them haven't read the Berkshire Hathaway annual report and think the world has passed Mr. Buffett and Mr. Munger by.

Later in the morning the head of sales drops by to talk about why your fund is seriously lagging the index so far this year. As you head to a luncheon meeting, the words "career risk" are rattling around in your head and you're wondering why you just bought an enormous house. By the time you get home to have a late dinner with the family, the weekend in Omaha is a distant memory.

If the professionals have too many short-term pressures to pursue the wisdom of Mr. Buffett and Mr. Munger, what about the individual investor? With a little translation, I think their basic principles are absolutely applicable.

Keep it simple

This has always been a hallmark of Mr. Buffett's approach. For long-term investors, sticking to a simple package is very important. That way, you keep costs down and can easily assess how you're doing. A well-constructed mutual fund is a far better choice than a structured product that is too complicated to understand, has a high fee and an inappropriate time frame (three to seven years).

Stay with your competence

While this applies to Mr. Buffett and Mr. Munger, who have thousands of stocks around the world to choose from, it also applies to individual investors and advisers.

You have a gazillion stocks, mutual funds, structured products and banking products at your disposal.

No matter which ones you choose, you should always understand what you're investing in.

In the same vein, if you have an edge in a particular industry, you may want to use that knowledge to buy individual securities.

Diversification

Mr. Buffett and Mr. Munger both prefer to count their stock holdings on one hand. Mr. Buffett points out that "wide diversification is only required when investors do not understand what they're doing."

In the context of a mutual fund portfolio, investors should be cognizant of how many stocks they own. You likely own hundreds or even thousands of stocks (Yikes!) through your various holdings. If you believe in active management, as we do at Steadyhand, then you have to limit your fund holdings while still being diversified.

Uncertainty is your friend

As perverse as this sounds, if you are still building your wealth (i.e. contributing to your portfolio as opposed to withdrawing), then you should be smiling when everyone is complaining about a lousy market. Why? Because stocks are on sale. You can buy more shares of Suncor, Shoppers Drug Mart or Cisco for the same amount of money. Bull markets, on the other hand, make you feel good about your portfolio, but your additional purchases are done at full retail price.

The power of compounding

To quote Mr. Buffett, "it's not necessary to do extraordinary things to get extraordinary results." If investors keep their costs down and let the power of compounding work for them, they are usually amazed at the results. For example, if you invest $100,000 in your RRSP and achieve an 8-per-cent return (net of fees and commissions), your account will have $466,096 in it after 20 years.

Market timing and trading

"Wall Street makes its money on activity. You make your money on inactivity." No translation required.