Warren Buffett has a message for investors. And it’s a surprisingly simple one:
Stop giving all your money to Wall Street!
In his recent letter to shareholders, Buffett said that Wall Street “loves the fees that deal-making provides,” and that the markets play right into their hands. In this case, he was referring to Initial Public Offerings (IPOs) and M&A activity. But in fact, the same principle carries over to everyday investing. In this article, I’ll explore how that works, and what you can do to counter it.
Trading fees eat into your income Every time you buy or sell a stock, you pay a fee to your broker. These fees can come in one of two forms–or both.
Direct commissions on the sale or being given unfavourable trade execution, i.e., being charged a higher price than you could have gotten, or offered a lower price than you could ask.
Commissions are the traditional business model for most brokerages. More recently, brokers have moved to a “payment for order flow” model that makes unfavourable execution a bigger part of the equation.
Either way, you pay money every time you trade a stock. Every single time you buy or sell, you’re paying some kind of price–whether you use a traditional broker or a “no fee” service like Robinhood. So, the more you trade, the more of your money you give to Wall Street. Over time, the costs can really start to add up.
Watch out for high-fee funds Another type of fee you need to watch out for are the fees in mutual funds and ETFs. ETFs also involve trading fees just like stocks do. On top of that, they also have managers’ fees. In the case of index ETFs, those fees are generally quite small. But if you get into actively managed funds such as those that financial advisors at banks tend to promote, the fees can be quite steep — sometimes 1% of your initial investment or more–and the fee isn’t waived if the underlying investments have a losing year.
Buffett-approved investments to consider If you’re interested in investing in a way that Warren Buffett does approve of, you have several options available to you. The first is to buy low fee ETFs, like the iShares S&P/TSX 60 Index Fund. Buffett considers these funds the best bet for average investors, as they’re low risk and require no special expertise. The second option is to buy Berkshire Hathaway (NYSE:BRKa) stock itself, since that stock is built on Buffett’s own holdings.
The third and final option is to buy value stocks like Suncor Energy Inc (TSX:SU)(NYSE:SU). That’s the one Canadian stock Buffett still holds after exiting the other two he previously held. Value stocks like Suncor are the types of stocks that Buffett usually likes to invest in. When you buy a stock that’s undervalued in the market, you can profit as the stock price rises to catch up with fair value.
Right now, Suncor Energy stock trades for just slightly more than the value of its assets, net of debt. The market thinks that the company’s losing quarters in 2020 make it worth less than it was a year before. Yet if we look at cash flow instead of GAAP earnings, we can see that the company is still generating value for shareholders. This makes it quite likely that the stock will rise once COVID-19 is over–and pay dividends along the way.
The post Warren Buffett: Stop Giving Your Money to Wall Street appeared first on The Motley Fool Canada.
Fool contributor Andrew Button owns shares of iSHARES SP TSX 60 INDEX FUND. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares), short March 2021 $225 calls on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares).
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