Getting close to the ISA deadline last year, my colleague Edward Sheldon looked at some advice from Warren Buffett that fits in very well with the long-term aims of investing in an ISA.
As we’re getting ready for our 2019 allowance, I want to look at a few more snippets from the sage, all of which I think should be at the core of our ISA strategy.
Long term
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
I have a friend who invests in top dividend shares in his ISA and then literally forgets about them — not so long ago he told me of some early ISAs with previous providers that had completely slipped his memory.Â
But he’d filled them with top quality FTSE 100 companies, and they’ve been doing very well. By not even looking at them for more than a decade, he’d avoided the temptation to do any trading, and not lost any sleep when they were down during the dips.
Buying a mix of FTSE 100 companies and then just switching off from them is definitely my preferred approach — but do make sure you eventually remember them some day.Â
Quality, not price
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Investing is about finding the best companies, not getting in at the cheapest price — and aiming for the latter can be a recipe for disaster, on at least two levels.
If you’re always waiting for a rock-bottom bargain price, then you’re going to miss the very best companies — because they’re rarely found at knock-down prices. And while you’re waiting for that unmissable share price dip, you’re likely to miss out on steady earnings growth and years of dividends.
The other reason to avoid bottom fishing is because ultra-cheap shares are usually cheap for a reason, and you’re increasing your chances of investing in dogs that are only going to lose you money.
Also remember: “Price is what you pay. Value is what you get.”
Markets win out
“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Doesn’t that tell you something? It’s in line with one of my favourite bits of UK financial statistics. If you’d invested £1,000 in the UK stock market in 1945 and reinvested all your dividends, it would have grown to £1.8m over the next 60 years, even taking inflation into account.
Sadly, most of the people I know wouldn’t go near the stock market, because they think it’s a horrible high-risk thing where you can lose your shirt in the next market crash.
And some of those people put their savings into cash ISAs, which these days will get you around 1.5% interest if you’re lucky — and that’s less than inflation and guaranteed to lose money in real terms.
A sensibly diversified investment in stocks and shares has beaten all other forms of investment over the long term.