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The interest rate cut and Warren Buffett’s advice for your cash

We’ve now got the lowest cash rate Australia has seen for decades: just 2.75%.

While that may be great news for the mortgage belt, for savers like you and I, it’s yet another kick in the teeth.

And the worst part about it? Those leading brokers who reckon interest rates could be headed as low as 2% could be right…and perhaps sooner than we all might think.

The “great rotation” just became a freight train

In the minutes after the announcement, the ASX surged… capping the bullish trend that’s seen the S&P/ASX 200 (Index: AXJO) (ASX: XJO) rise some 11% so far this year.

Overnight the Dow closed above 15,000 for the first ever time.

Here in Australia, our market has again taken flight, jumping higher in early trade. Not surprising really, especially when respected commentator Michael Pascoe said today in The Age

“And right now, even after the market has rallied to start the year, equity yields slaughter the best term deposit rates you could have grabbed last year.”

The “great rotation” and “flight to equities” we’ve been hearing about for the last several months just became a freight train.

Which brings me to some key advice dispensed by Warren Buffett as he addressed shareholders at the Berkshire Hathaway (NYSE: BRK-A, BRK-B) annual general meeting this past weekend.

Simply read on for two important ideas from the ‘Oracle’ himself.

Of course Buffett, in addition to being a billionaire and one of the world’s richest men, is probably the greatest living investor. So ignore this advice at your own peril…

Woolies $40? Telstra $6?

As you may have noticed, Woolworths (ASX: WOW) dropped nearly 2% yesterday — on no news at all!

Telstra (ASX: TLS) shares also dropped, though more modestly.

Still, with the freight train roaring into gear, it may be full speed ahead for the share price of these giants. At least in the near term.

Two pieces of advice from Warren Buffett to YOU

Of course, even Warren Buffett has made a few missteps over the years.

For one, he’s famously admitted to being an “air-oholic”, with an investment in US Air figuring as one of his less successful – though still profitable — ideas.

(It’s a lesson many of Australia’s most powerful have taken to heart, clearly. Wesfarmers (ASX: WES) CFO Terry Bowen has said that an airline is most definitely “off the table” in terms of that conglomerate’s acquisitions!)

For those of you who followed The Motley Fool’s live blog of Buffett’s Berkshire Hathaway AGM, our own Joe Magyer posted this concise summary of Buffett’s (admitted!) mistakes:

Joe Magyer:  Buffett is fond of pointing out four big mistakes. The first is not getting religion on the value of buying great businesses at good prices sooner. Prior to that, he was still anchoring on buying more Benjamin Graham-type holdings.

Second was that Berkshire Hathaway itself, a mediocre textile company when Buffett commandeered it, was a capital drain.

Then there are mistakes of omission, the ones that Buffett knows he didn’t make but that others didn’t see. He refers to those as having been sucking on this thumb.

The last biggie has been using Berkshire shares as a currency for acquisitions. It has cost Berkshire dearly over the years. To his credit, he’s very up front about these mistakes. Just one of the reasons we love Uncle Warren.

That Warren Buffett has been right more often than he’s been wrong is indisputable. And successful investing isn’t about being infallible, but about being right more often than you’re wrong. Buffett’s $50b plus fortune is testament to that.

So it’s only natural to want to know what Buffett seems to be advising you do with your cash now.

Let’s see what Buffett has to say about the mistakes we mere mortals have been making…

The problem of cash… and selling too soon

To decipher this, consider two quotes from this year’s annual meeting. The first, I mentioned in yesterday‘s Take Stock (our free investing email newsletter) and I believe it’s so important it bears repeating…

Buffett said, “The problem faced by people who have stayed in cash or cash equivalents… it is brutal. I don’t know what I would do if I were in that position.”

As I pointed out yesterday, investors who’ve opted for “safe” cash and term deposits have also sat out the incredible bull market on both sides of the Pacific (which looks to have some steam left in it!).

Looking out to the years and months ahead — and making no attempt to time the market, but instead thinking of ‘time in the market’, the takeaway is clear:

Sitting in cash can be dangerous. Investing for the long term in shares of the best companies can help you to preserve your purchasing power and build your wealth over the long term.

Even Warren Buffett wishes he’d got at ‘great businesses for good prices’ sooner!

The second piece of advice I gleaned from the Berkshire Hathaway annual meeting is  similar.

“Don’t be so stupid as to sell these shares”

It comes from Buffett’s righthand man, Charlie Munger, who had this to say about Berkshire once he and Warren were no longer around: “My thoughts are simple. To the many Mungers in the audience — don’t be so stupid as to sell these shares.”

Munger was speaking of Berkshire Hathaway shares, of course!

With its legendary, fully franked 28 cent dividend, Telstra is the darling of Aussie investors. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: Is It Time to Sell Telstra?

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Bruce Jackson has an interest in Woolworths, Wesfarmers, Telstra and Berkshire Hathaway. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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