Buffett, Munger offer more sound advice

Here are some paraphrased words of wisdom from superinvestors Warren Buffett and Charlie Munger from the recent Berkshire Hathaway annual meeting:

On companies trying to produce smooth results: It’s bad when headquarters says that earnings must go up regularly. In business, earnings don’t always go up regularly. You don’t want to set up a system that exerts pressure on employees to do things that they know they shouldn’t do.

On the declining dollar: It’s tough for individuals to invest in foreign currencies. Anything you do to develop your own abilities and your business will be more productive than worrying about foreign exchange rates.

On the market’s direction: If the market gets cheaper, we’ll be buying as prices drop. I’m (Buffett) always looking to buy stocks, just as I buy groceries every week, and I prefer lower prices for both. We spend no time trying to forecast what the market will do. We don’t know which way it’s headed. We do know that sometimes we’ll get great value for our money.

On Social Security: Anything that reduces Social Security payments below their current levels is a mistake. We could raise the payroll tax cap from $90,000. I (Buffett) don’t understand why the administration worries about the size of the deficit in 25 years when it doesn’t seem to care much about the size of the deficit now. If the system isn’t changed, the percentage of gross domestic product devoted to Social Security will rise from 4.5 now to 6. That doesn’t seem so bad. Social Security is a very successful program with hardly any fraud. All this talk to change it is twaddle.

Advice for investors: If you have the choice of owning bonds yielding 4.5 percent or owning stocks for the next 20 years, you should own stocks. But if you think you can earn double-digit annual returns in stocks, you are kidding yourselves. The stock market should generate average annual returns of 6 percent to 7 percent.

For more, read Buffett’s letters to shareholders at www.berkshirehathaway.com and Roger Lowenstein’s book, “Buffett: The Making of an American Capitalist” (Main Street Books, $19).

Ask the Fool

Q: How can I stop getting all these credit card offers in the mail? — F.C., Toledo, Ohio

A: As part of the Fair Credit Reporting Act, credit reporting agencies are required to maintain an opt-out list of consumers who don’t want to receive pre-approved (or pre-screened) offers. The four largest reporting agencies — Equifax, Experian, TransUnion and Innovis — manage the list. You can add yourself to it at www.optoutprescreen.com or by calling 1-888-OPT-OUT. You can ask to be kept on the list for five years or forever, and it will at least reduce the number of offers you get in the mail, though it may not eliminate them entirely.

Signing up is free. You’ll have to provide your name, address, Social Security number and date of birth, because each credit report is tagged by your Social Security number, not your name. If you move, you should opt out again, to register your new address.

Q: How much will health care cost the average retiree? — G.B., Greenville, N.C.

A: According to recent estimates, the Medicare trust fund is expected to run out of money by 2018. Just a few years ago, the expected date was around 2026, but rising healthcare costs, lower tax receipts and new prescription-drug policies are having an effect.

Any medical expenses not covered by insurance or Medicare must be paid for out of a retiree’s nest egg. How much will be needed to cover such expenses? According to Fidelity Investments, an average couple retiring this year will need to have $200,000 socked away just to cover healthcare costs for the following 20 years. (This doesn’t include the cost of long-term care, which many people will need.)

It’s vital to plan effectively for retirement. Learn how at www.fool.com/retirement.htm.

My dumbest investment

I can proudly declare that my greatest trade ever was selling Enron at about $30 per share. But my dumbest investment was buying Enron sometime earlier, at about $65. My aim at the time was to get exposure to the oil market. So I selected Enron for, well, its creativity (offering derivatives on weather, trading broadband capacity and more). Little did I know how creative it was. As I recall, it was a Friday when word came out that Enron was trading with companies it had set up in which its CFO had a direct interest. I got out that Monday. — Dave Joelson, Stamford, Conn.

The Fool Responds: Many Wall Street professionals got blindsided by Enron, too. Before the company imploded, many people found its financial statements hard to decipher. That can be one red flag: If you aren’t comfortable that you understand how the company makes and manages its money, you might want to avoid it. Of course, it’s not always easy to detect outright fraud.