On the Subject of Investing

I went through Barnes and Noble a little while back. In the "Investing" section of the store, there are a plethora of books on Warren Buffet, the world's richest man and "the sage of Omaha."

Most of the books go into his philosophy of investing, what he considers most important and what not. In broad brush strokes, Mr. Buffet is a "value investor", a disciple of Benjamin Graham, and likes to buy solid, under-valued companies with good managements. Sometimes he waits years to purchase a company that meets his specs.

But what advice does Mr. B. have for the average, non-professional, semi-skilled investor. You know, the investor who does it part-time and whose main interests are somewhere else? Here it is:

... If you're* not going to be an active investor -- and very few should try to do that -- then you should just stay with index funds. Any low-cost index fund. And you should buy it over time. You're not going to be able to pick the right price and the right time. What you 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.

-- Warren Buffet in Fortune Magazine, April 28, 2008

I've invested in various funds long enough to know the man has a firm grasp on what he's talking about. Pay particular attention to "you should buy it over time." This is dollar-cost averaging and is crucial, because over a span of years the index fund is going to move up and down like a freaking roller-coaster, and you want to go right on buying during the dips, so that you're buying cheaper shares when it's down.

What you don't want to do** is panic after a drop and pull money out, because invariably you will be bailing at or near the bottom of the cycle.

Trust me on this.

* I've substituted "you" for "they" throughout the quote.

** I need to point out that I am not a certified financial consultant/advisor.