Warren Buffett

Bloomberg News

Earlier this week ahead of the release of his highly-anticipated annual letter to shareholders Saturday, Warren Buffett released an excerpt on Fortune that gives investors four long-term investing tips.

Citing two key investments, one made in the 1970s and the other in the 1980s, Mr. Buffett, the chairman and CEO of Berkshire Hathaway. gave investors several pieces of clear, tangible advice for making long-term investing decisions.

Heres a look at four tips from the Oracle of Omaha:

#1 Own low-cost S&P 500 index funds

Mr. Buffett emphasizes this point again and again in this excerpt from his letter. Its a theme hes honed in on throughout his investing career: Dont try to pick winning stocks. Instead own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund helps any investor do this well.

In the 20th century, the Dow Jones industrial average advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st centruy will witness further gains, almost certain to be substantial.

Mr. Buffett writes that when he passes away, he has left instructions for his trustee to invest the cash designated for his wife in two ways 10% in short-term government bonds and 90% in a very low-cost S&P index fund. He suggests Vanguards index fund.

I believe the trusts long-term results from this policy will be superior to those attained by most investors who employ high-fee managers.

#2 Ignore your or anyone elses predictions about long or short-term price changes. Focus instead on productivity of assets

Weaving his tale of two investments, both of which have paid off handsomely over the past several decades, he said he completely ignored what the economy, interest rates, or the stock market might do in the immediate years following. Instead, with these investments a farm in Nebraska and NYU-area real estate he looked at the future productivity of these assets.

Over decades, he asked himself would corn prices ultimately keep rising? Could the actual building in which he was investing command higher price per square foot than they were at the time? In both cases he answered yes.

For any investment, he said its key to to understand the productivity of particular assets rather than analyzing say whether the price of farmland or real estate in New York City now or in five years would go up. If you instead focus on the prospective price change of a contemplated purchase, you are speculating.

#3 Ignore the macro environment and political environment

He notes that when he and his partner Charlie Munger buy stocks, they think of them as small portion of businesses and try to see the earnings power of these businesses over the next five years or more. In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment.

Mr. Buffett said he didnt worry about real-estate prices or stock prices during the Great Recession. Could anyone really believe the earth was going to swallow up the incredible productive assets and unlimited human ingenuity existing in America?

#4 Make as few investments as possible

Investors these days are pushed to be active and to buy low, sell high. Slow it down, says Mr. Buffett. Frequent buying and selling only cuts into long-term returns.

Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit.

Mr. Buffett continues: Ignore the chatter, keep your costs minimal, and invest in stocks as you would a farm.

For more timely tips from the investing legend, stay tuned to MoneyBeat Saturday morning. Well be live blogging his letter to shareholders and Berkshire Hathaways earnings.