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I’d say every one of Warren Buffett‘s best-known quotes is a gem for Stocks and Shares ISA investors.
But I think these three, from his annual letters to Berkshire Hathaway shareholders, should help anyone starting an ISA today.
Make the most of it
Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.
2016 letter
Buffett was talking about stock market downturns there. But I reckon it rains gold for investors every year in April.
That’s when each year’s £20,000 tax-free ISA contribution limit starts. And we don’t pay any tax whether we hold for a year and make a few quid, or invest for decades and make a million.
And every pound we don’t use is a chance that’s gone. It doesn’t carry over, and we can’t make it up next year.
The ability to make tax-free gains from a Stocks and Shares ISA is surely economic gold. And I reckon we should make the most of it by investing as much as we can.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
No great secrets
It is not necessary to do extraordinary things to get extraordinary results.
1994 letter
At the most recent count, there were more than 4,000 ISA millionaires in the UK. The top 50 of them had an average pot of £8.5m.
They must have done something extraordinary to achieve that kind of success, right? Wrong!
The top ISA investors are not the ones who kept spotting the next big thing, the next multibagger growth stock.
No, do you know what the millionaire ISA investors’ top stocks are?
They buy boring FTSE 100 stocks like Lloyds Banking Group, Shell, and GSK.
And around 40% of millionaire cash goes into investment trusts, with Alliance Trust a firm favourite. For non-millionaires, it’s about 20%.
Companies, not stocks
We own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.
2022 letter
One key secret to long-term ISA success is to understand what it is we’re buying when we buy stocks and shares.
A share isn’t a betting slip, to win or lose at the next quarter. It’s not a point on a graph, for us to follow the wiggly lines with blind hope.
A share is simply part ownership of a company, and from it we get our share of the profits. It’s just like owning a corner shop, except the whole thing is bigger and there are more owners.
Once we get our heads round that, it should be clear that the performance of the company is what we should use to make our decisions. Not what the share price has done.
And to succeed, we should aim to fill our ISAs with the best quality companies we can find.
More Buffett wisdom
I like these three quotes. And they all point to Warren Buffett’s approach to investing in the stock market and to minimising risk.
Shares can fall as well as rise. In fact, in 2019-20, the average Stocks and Shares ISA lost 13%. But the past 10 years have brought average ISA returns of 9.6%.
The best way to boost our chances is surely to buy shares in top-quality companies and hold them for the long term. Buffett reckons at least 10 years, and I agree.
