Can investors replicate the success of the the master Warren Buffett?
For as long as I can remember, the investment maxim that most evokes a mix of adulation and performance anxiety is "Invest like Warren Buffett."
How can mere mortals emulate an investing deity? In truth, most of us will never come close to "the Sage of Omaha."
He's done all the things a stellar investor should do: He buys when there's blood in the street, finds solid companies at great prices and keeps them "forever".
Lacking Buffett's phenomenal verve and mettle, though, most of us won't do this. But that doesn't mean we're doomed to failure.
Fortunately, the multibillionaire chairman and chief executive of Berkshire Hathaway has been generous with his wisdom.
Two recent books published in November compile and analyse it elegantly: 'Tap Dancing to Work' by Carol Loomis, a long-time 'Fortune' writer and Buffett friend and 'Think, Act and Invest Like Warren Buffet' by Larry Swedroe, principal and director of research for Buckingham Asset Management.
What key advice resonates most?
1. Stick with index funds
Although you probably won't get the returns of Berkshire Hathaway with index funds, you can still get pretty close to market returns without having to be an oracle yourself.
"If individuals 'aren't going to be an active investor – and very few should try to do that – then they should just stay with index funds. Any low-cost index fund'," Loomis quotes Buffett as advising. "And they should buy it over time. They're not going to pick the right place and time."
2. Don't play Buffett's game
Although Buffett is often able to time his purchases brilliantly, chances are, you won't. In fact, research shows that most individual investors' records on timing the market successfully are dismal.
One of the most important Buffett shibboleths is acknowledging that you won't be able to predict the market.
If you take his advice on index funds and stay the course, "the only way an investor can get killed is by high fees or by trying to outsmart the market", he said in 2008.
No big secret here. When you find good stocks, buy them at low prices and hold them. For those buying individual stocks, this means dollar-cost averaging – fixed investments every month and reinvesting the dividends. Most large companies offer dividend reinvestment plans for this purpose.
Swedroe reinforces Buffett's advice by citing academic studies that actively managed mutual funds show "no evidence of the ability to persistently generate outperformance beyond what would be randomly expected." So a passive strategy can work for most investors.
Most individuals also get scorched on transactions and trading costs.
You can inexpensively own most of the stock and bond market through two funds: The Vanguard Total Stock Market Index ETF and the Vanguard Total Bond Market Index fund.
The company charges you 0.06pc and 0.22pc annually, respectively, for managing those funds.
3. Think long term
Buy durable enterprises that will produce profits for decades, not quarters.
Buffett has bought into enterprises like BNSF Railway Co and Coca-Cola that have been around for a long time and are not going away.
They have good prospects not because of recent "rear-view" quarterly earnings reports. When Buffett says he's buying "businesses" he's committed to managements that generate cash, profits and dividends decades into the future.
4. Keep your cool and be a contrarian
Booms and busts don't seem to phase Buffett, who will hold on to his cash when most are buying and open his wallet when the market crashes.
He's not distracted by television blowhards or prevailing sentiment – emotions that can derail even the smartest and investors. He knows how to seize opportunities when most investors are seized by fear.
When Goldman Sachs called him to take a stake in the company at the height of the 2008 meltdown, Buffett got some incredible terms on his $5bn investment: a 10pc annual dividend and repayment that eventually netted him $1.7bn when Goldman paid him off early last year.
Who do you know can demand and receive a legitimate 10pc dividend these days?