Buffet Warns of ‘tapeworm’

That was Warren Buffett’s soothing advice for equity investors in October 2008, after the collapse of Lehman Brothers had triggered a global financial panic and sent stock markets tumbling.

He’s been betting on the U.S. economy ever since with remarkable results, as he explained Saturday in his annual letter to shareholders, which had more than the usual amount of explicit advice for both professional and ordinary investors.

It pays to listen to this guy. Many studies show that over time most money managers fail to equal, let alone surpass, the performance of passive investments in market indexes.

Buffett is the rare exception, having beat the S&P 500 by a wide margin over a 58-year career; first as a hedge fund manager and since 1965 as chairman of Berkshire Hathaway.

A recent academic study — which focused on his securities investing and excluded Berkshire’s vast portfolio of insurance and industrial subsidiaries — concluded that he is probably the most successful investor of all time.

Here are some highlights from this legend’s latest seminar on investing.

1) Buy stocks in good U.S. companies.

Despite plenty of uncertainty, the nation remains the world’s best place to invest. Buying shares in well-run companies is as good a “bet” in the 21st Century as it was in the last.

“America’s best days lie ahead,” Buffett wrote.

This runs counter to the typical advice from Wall Street, which reaps high fees steering clients into emerging markets, commodities, currencies, derivatives and other exotic diversification strategies.

Sure, the U.S. has its share of problems; from rising taxes to budget deficits and regulatory creep.

And Buffett issued a strong warning: “Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them.”

Still, the American system remains the world’s most dynamic, blessed with an adaptable legal and political structure that rewards people who find new ways to create wealth.

2) Forever is the ideal holding period for a good investment.

Buffett illustrated this point with a non-stock deal. In 1986 he bought a Nebraska farm made available by a bank failure.

After consulting with his farmer son about operating expenses and crop production, he estimated the property would return an average of 10 percent on his purchase price.

He reasoned that people would still need corn and soybeans in the future.

“Now, 28 years later, the farm has tripled its earnings and is worth five times or more what I paid.”

3) Ignore market hysterics — until they produce bargains.

Buffett compared the stock market to a moody neighbor who stood at the fence each day shouting out offers to either buy the farm or sell his own at various prices. Most people can own a profitable farm or apartment building for decades without being tempted into panic selling.

“Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well.”

Agencies