Warren Buffett’s 5 Property Investing Rules

Warren Buffett is an American business magnate, investor and philanthropist, regarded as the most successful investor in the 20th Century. This week he announced a $500 million deal with insurer IAG, and that he will deploy his company Berkshire’s $2.2 billion share of the insurer’s annual gross written premiums in the Australian stock market. His investment in the Australian stock market will be on going annually in the years ahead. These are numbers well beyond the average Australian investor but Buffett does have 5 rules on property investing which are also appropriate for the small investor.

These “rules” make for interesting reading and can be applied by any investor:

  1. You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognise your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no”. [We believe that investing is simple. Invest in quality assets and slow and steady wins the race].
  2. Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake. [Ask yourself "how confident am I that this property will double in value every 7 to 10 years". If you are not confident, don't invest.}]
  3. If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success in doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent years is not a reason to buy it. [Investing is about sustained and perpetual growth, not short term price movements. Buying property in the "next big growth suburb" isn't investing, its speculating and speculation (read gambling) doesn't work.]
  4. With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at the stock prices, give it a try on weekdays. [Focus on long term performance and make long term investing decisions. Short term investing decisions are typically made because of fear or greed, not sound fundamentals].
  5. Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blue your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth”). [Ignore the media and all the stuff they write about property bubbles and so on. Run your own race. Invest when it suits you and focus only on quality and fundamentals.]

Stick to these 5 rules and you’ll be a successful investor. Simple.