Saturday, April 19, 2008

What Would Warren Do? A Valediction

Here's a farewell message to the students in my law school basic finance class:

A backward-glance reflection, as the semester winds down. I've enjoyed teaching this class this year (I usually do), but there is one systematic problem. That is: some students come in here every year hoping they'll find out how to get rich investing. And I always have to tell them: look, I don't really know how to get rich investing. Getting rich investing is hard work. Unless you are willing to be disciplined and systematic and pretty much full time (and it probably helps to have a knack), you are better off not trying. Stick to low-cost mutual funds--maybe index funds--with diversified portfolios. This is a game for professionals, and in a game for professionals, amateurs are going to get beat up. Just think of the "outsiders" who win poker championships: they don't just drop through the transom, they have worked and worked and worked to polish their skills. Tastes differ, but my mortgage is paid, and my retirement is (more or less!) secure--I'd rather read a book, or go to the opera.

You don't believe me? Okay, believe Warren Buffett. There's a wonderful new interview with Warren in the current Fortune. Here's the takeaway paragraph (link):

What advice would you give to someone who is not a professional investor? Where should they put their money?

Well, if they're not 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. And they should buy it over time. They're not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don't buy all at one time.

Footnote: I see that Warren thinks "we've got three unusually good candidates this time." Hm, maybe I ought to pay attention (link).

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