Ask Money

Channeling Warren Buffett

Chris Farrell Apr 11, 2008

Question: Mr. Buffet discusses “Fanciful Figures…” in the Berkshire Hathaway 2007 Annual Report (pp. 18-20). He asserts that the compounded annual gain for the DJIA in the 20th century was 5.3%. He goes on to say that in order for both individual and institutional investors to match a 5.3% compounded return on investment during the 21st century, the DJIA, “…would need to to close at about 2,000,000 on December 31, 2099.” This is a possibility which he rejects.

He goes on to point out that any financial adviser suggesting that an investor expect 10% annually from equities in this century are “…direct descendants of the queen in Alice in Wonderland.”

Are corporate pension managers, the financial planning community, and those of us investing in stocks, bonds, ETFs, etc., kidding ourselves regarding our true ability to predict and save for our financial future? Or are we better off emulating those who take on 120% LTV subprime mortgages and living on minimum payment credit cards? Tim Longmont, CO

Answer: I love Warren Buffets annual report. Any saver or investor can profit by reading the Letter from the Chairman. You can read them at I think his message is conservative. Yes, invest in the markets (and for most people he has written that smart investing means putting stock market savings into a broad-based equity index fund). Diversify your portfolio. Stick with quality companies. Save, don’t take on frivolous debts (yes to a mortage, no to credit card debt). And keep your expectations realistic when it comes to investment returns–after taxes and after inflation. But don’t go the highly leveraged route. That’s a path for financial catastrophe for most of us.

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