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How often can you hear advice from the world’s greatest investor? In 1998, at the beginning of the tech bubble, Warren Buffett spoke to a group of MBA students at the University of Florida. He spent ninety minutes answering questions about his investment philosophy. Though this presentation was made almost nine years ago, his advice is just as valid today.

For example, at the 1:15 mark of the following clip Buffett explains why he believes index funds are the best choice for most investors. (Be warned: the first 1:15 might be a little boring!)

If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than world, then I believe in extreme diversification. I believe that 98 or 99 percent — maybe more than 99 percent — of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs. All they’re going to do is own a part of America. They’ve made a decision that owning a part of America is worthwhile. I don’t quarrel with that at all — that is the way they should approach it.

In a different segment, Buffett describes another advantage of index funds:

Wall Street makes its money on activity. You make your money on inactivity. If everybody in this room trades their portfolio around every day with every other person, you’re all going to end up broke. The intermediary is going to end up with all the money. On the other hand, if you all own stock in a group of average businesses and just sit here for fifty years, you’ll end up with a fair amount of money and your broker will be broke.

He’s like a doctor who gets paid on how often he gets you to change pills. If he gives you one pill and it cures you the rest of your life, he’s got one sale and one transaction, that’s it. But if he can convince you that changing pills everyday is the way to great health, it’ll be great for him but you’ll be out a lot of money and won’t be any healthier.

If you’d like to watch the entire talk in one piece, it’s available on Google Video. The YouTube version is divided into ten segments. These are more manageable for me; I was able to watch one at a time until I had finished the entire talk. The segments cover:

  • Part 1: There’s more to success than intelligence and energy. You need integrity, too. “The chains of habit are too light too feel until they’re too heavy to be broken.”
  • Part 2: “If you risk something that is important to you for something that is unimportant to you, it just does not make any sense [no matter how good the odds].” “You only have to get rich once.” “You’re out of your mind if you keep taking jobs you don’t love because you think it’ll look good on your résumé.”
  • Part 3: Take a job you love. “If you think you’re going to be a lot happier if you have 2x instead of x, you’re probably making a mistake.” What sorts of businesses does Buffett like? Businesses he can understand. The concept of Moats. Mindshare.
  • Part 4: How does Buffett determine a fair price for a stock? The importance of branding.
  • Part 5: Has Buffett ever bought a company when the numbers told him not to? The importance of staying inside your “circle of competence”.
  • Part 6: The importance of a “wonderful business” and the power of time. What investment mistakes has Warren Buffett made? “It’s better to learn from other people’s mistakes, if possible.” Don’t dwell on your mistakes. Focus on the future and the possibilities it holds. Buffett doesn’t worry about “the macro stuff” like interest rates.
  • Part 7: How do you know when it’s time to sell a business? Buffett’s goal is to buy businesses that he’ll own forever.
  • Part 8: Buffett discusses diversification. For the common investor, diversification is important — they should purchase index funds. But for professional investors, diversification is bad. Buffett gives a little insight into how he evaluates businesses.
  • Part 9: Buffett doesn’t care about large-cap stocks vs. small-cap. He looks for businesses he understands. Buffett’s impressions of REITs (real-estate investment trusts, which are basically mutual funds that invest in real estate).
  • Part 10: If you’re going to be a “net buyer” of stocks in the near future, then it’s in your best interest for prices to fall, because you’ll get stocks “on sale”. The two most important essays ever written on investing are chapter 8 (”The Investor and Market Fluctuation”) and chapter 20 (”Margin of Safety as the Central Concept of Investment”) of Benjamin Graham’s The Intelligent Investor.

Enterprising readers can find more Warren Buffett videos on YouTube. Let me know if you discover anything good!

[via reader David Hatch]