Co-authored with Susan Dziubinski, director of content for Morningstar.com.

These days, everyone wants to know what Ark's Cathie Wood is buying and selling. It's not difficult to figure out why. Wood's actively managed ARK Innovation ETF (ARKK) returned a stunning 153 per cent last year. Naturally people are curious about what she's investing in to generate those kinds of results.

An antidote to all the talk about hot stocks and speculation emerged last weekend at Berkshire Hathaway's annual general meeting. Warren Buffett displayed his thoughtful, fundamentals-based approach to investing, touting the virtues of buying the market and holding it, forever. His ideas may seem out of touch in a market where Tesla (TSLA) trades at a 99 per cent premium to Morningstar's fair value estimate, Elon Musk is sending Dogecoin to the moon and social media is considered a valid source of stock tips. Buffett has also been accused of being out of touch with the modern economy and for "betting against" America during the pandemic. The first shareholder question asked at the meeting demonstrates this:

You would be hard-pressed to find someone who doesn't believe there is room for ultra-aggressive investing (or speculation, as many would call it) in some portfolios. That's what dollars earmarked as "mad money" are for. But mad money is money you can afford to lose. It's not the money you're relying on to build wealth to fund retirement, buy a home, or finance any other goal. You need "sane money" (and a decent savings rate) to bankroll those dreams.

The good news is that the sane money approach isn't complicated, as Buffett noted in his annual letter to shareholders earlier this year: "All that's required is the passage of time, an inner calm, ample diversification, and a minimisation of transactions and fees."

Looks like investors today can still learn quite a bit from Buffett.

Here are some lessons the Oracle of Omaha sought to impart to first-time investors. The short of it: the average person can't pick stocks; most investors would benefit from purchasing an S&P 500 index fund over the long term.

Extraordinary things can happen

Buffett took time to remind investors, particularly newer investors, of the extraordinary things can happen in stock markets. To illustrate this, he ran a list of the 20 largest companies in the world by stock market value (on 31 March 2021). Apple (AAPL) was number one with just over $2 trillion - LVMH Moët Hennessy Louis Vuitton at number 20, worth around $330 billion.

Looking back at the top 20 from 1989, Buffett noted that none of the top 20 today appeared on the list 30 years ago.

20 largest companies by market cap

Source: Berkshire Hathaway AGM, Bloomberg, EQS Function

Buffett then invited the audience to think about how many of these companies will still be on the list in 30 years.

The lesson for investors, Buffett said, is that the world can change in very dramatic ways. Don't get too sure of yourself.

Investing themes are attractive. Don't fall for them

Buffett said the best thing first-time investors can do is to be in the market.

To illustrate this point, Buffett said investors are attracted to popular industries, whether that be railways in the mid-1950s or tech companies today. But picking the winners and losers in an industry is incredibly difficult. For example, Buffett said in 1903 the "place to be" was the auto industry. The thesis was that someday 290 million cars would be buzzing around the US. However, there were at least 2,000 companies that entered the auto business. In 2009, there were three left, two of which went bankrupt.

‘The average person can't pick stocks’

During the Q&A portion of the meeting, Buffett was asked about whether long-term Berkshire shareholders should continue holding their stock or diversify their risk across an index. The question comes after Berkshire Hathaway's stock underperformed the S&P 500 index by -18.48 per cent in calendar year 2020. Buffett expressed a preference for holding the market.

Morningstar's director of personal finance Christine Benz similarly believes individual stocks are terrible investments for people starting out.

Buffett's take on hot-button issues:

  • Bitcoin: On Bitcoin, Buffett refused to engage. Vice-chairman Charlie Munger was somewhat more forthcoming, saying that investors should steer clear: "Of course, I hate the Bitcoin success and I don't welcome a currency that's so useful [for] kidnappers in our stores and so forth, nor do I like just shuffling out a few extra billions and billions and billions of dollars to somebody who just invented a new financial product out of thin air. I think I should say, modestly, that I think the whole damn development is disgusting and contrary to the interests of civilisation, and I'll let leave the criticism to others."
  • Trading apps: Asked what he thought about Robinhood and other trading apps that allow investors of all ages and experiences to participate in the stock market Buffett said that they had a driver of the "casino aspect" of the market dealing in puts and calls. He was also concerned about how they handle their sources of income and communicate with customers about fees.

He continued:

Anything else?

The panel also discussed several key issues facing investors including inflation, bank stocks, Elon Musk's SpaceX, stock buybacks, insurance firms, interest rates, SPACs, selling Apple and airline stock, Berkshire's succession planning, energy companies and ESG risk, ESG reporting and the Fed's "extraordinary" action amid the covid-19 crisis. You can check out the full recording here. Don't be put off by the length. The session starts around 01:10.

Buffett himself admitted to a few mistakes, including selling some of the firm’s Apple stock last year. In response to the the shareholder's question (above), Buffett said:

He stuck to his decision to pull out of airlines early in the pandemic despite the sector roaring back to life. He praised the swift actions of the Federal Reserve and credited the institution with the US recovery.

For details about the company's latest earnings, Morningstar analyst Greggory Warren details them here.