If you're interested in growing your money, please please read Warren Buffett's annual letters. In this year's annual letter (I'm attaching the Fortune article that summarizes it), Buffett uses stories of two relatively minor real estate investments (one is a farm in Omaha, the other a retail property near NYU in New York). He uses these investments to illustrate some key fundamental investing principles:
1. Simple Analysis
In both cases, analysis was simple, meaning that Buffett felt he needed no unusual knowledge or intelligence to estimate revenues and costs. He was able to conclude that the investment had no downside and potentially had substantial upside. Actually, Buffett insists that you don't need to be an expert to get good investment returns, but you do need to know what you do and do not understand - and never make decisions outside of your comfort zone of competence. If you don't understand something, just don't get involved. If you cannot estimate what the assets will earn, it's not an asset you should be buying - look for something else. Buffett's approach (Value Investing) is about buying a good asset at a discount, rather than speculating that its value is going to increase at some point.
2. Market Predictions Are a Waste of Time
"Forming macro opinions or listening to the macro or market predictions of others is a waste of time," Buffett says. It's tempting to base your purchases on the macro or political environment or the views of other people. The point is that a good investment will deliver good returns in any environment (the farm will keep growing corn and students will keep going to NYU, thus making Buffett's investments minimally dependent on the economic and political fluctuations).
3. Diversify and Keep Costs Minimal
You don't need to be a great stock-picker as long as you diversify and keep your costs minimal (for example, by buying the index funds). American businesses have done fabulously well in aggregate (the Dow Jones industrial index advanced from 66 to 11,497, paying a rising stream of dividends), so there is no need to be a fantastic stock picker to do well.
Please note that when Warren suggests a future portfolio of 90% S&P index funds, he is talking about a very long-term portfolio. It is not meant for retirees with a short-term focus and high income needs.
4. Don't Time the Market
An average investor faces the danger of buying high and selling low (because they often gain the confidence to enter the market by the time it's already nearing its peak). Buffett's solution is to accumulate shares over a long period of time and to "never sell when the news is bad and stocks are well off their highs." Please read on...