“Most people get interested in stocks [or assets like Bitcoin] when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” – Warren Buffett
Warren Buffett, Chairman and CEO, Berkshire-Hathaway, the Oracle of Omaha, has been the most successful investor of the 20th Century and is considered by many to be one of the greatest investors of all time.. His investment track record is simply remarkable with compounded annual returns over 20% over the last 55 plus years.
Essentially, if you had invested $10,000 USD in his investment firm Berkshire-Hathaway in 1965, that $10,000 USD would today be worth over $280 million US dollars.
What follows are several investing lessons all investors can learn from Buffett:
Investing Lesson 1: Risk Comes From Not Knowing What You are Doing
Many first-time investors have started trading in stocks and cryptocurrency without really understanding how these asset classes work. Buffett has advised investors to not chase everything that is new and shiny, and instead to only focus on the opportunities that they painstakingly researched and understand.
Stick to your circle of competence. Try not to be good at all things, and instead try to be great at one thing and give it all you`ve got. It`s better to be known for one thing than nothing.
“Never invest in a business you cannot understand.” Warren Buffett.
Investing Lesson 2: System Overpowers the Smart
Buffett advises that retail investors use a low-cost index fund. Investing via index funds gives you the advantage of a system, it allows for a disciplined investing cycle via SIPs and keeps emotions away from corrupting that framework. In other words, Buffett wants retail investors to follow a system over everything else.
And the system and a clear investing framework finding great business at good reasonable prices that have powered Berkshire Hathaway for the last five decades.
Change the way you see setbacks. You will make mistakes, probably lots of them, as long as you choose to swing for the fences. Buffett believes you can do well if you program your mind to see opportunities in every setback.
“A low-cost index fund is the most sensible equity investment for the great majority of investors.” Warren Buffett.
Investing Lesson 3: Have an Owner’s Mindset
Buying a stock is effectively buying a business and investors should follow the same kind of rigorous analysis and due diligence as one would do when buying a business.
The lesson here is that instead of getting too caught up in the recent movement of the stock price, you should spend more time analyzing the business fundamentals behind the stock price.
You can only genuinely value a business if you can accurately predict future cash flows. This is impossible without an understanding of the company’s operating environment and fundamentals.
And once you have answers to the pertinent questions, invest in a business that you would like to own for the next 10 to 20 years.
On how to invest in stocks. His response is a simple five-word answer: “Invest in the long term.”
“That whole idea that you own a business you know is vital to the investment process.” Warren Buffett
Investing Lesson 4: Be Fearful When Others are Greedy and Be Greedy When Others are Fearful
The stock markets work in cycles of greed and fear. When there is greed, people are ready to pay more than what a business is worth. But when fear sets in, then great businesses are available at huge discounts for anyone who is ready to keep their gloomy emotions aside.
In Berkshire’s 2018 shareholder letter, Buffett wrote, “Seizing opportunities does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.”
In other words, Buffett encourages investors to not follow the herd. And strip away emotions when making investment decisions, which is likely to open up more profitable opportunities.
“What investors need is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.” Warren Buffett
Investing Lesson 5: Save and Preserve Capital for A Golden Rainy Day
Warren Buffett goes by the philosophy – hold onto your money when money is cheap and spend aggressively when money is expensive.
Financial expert criticized Buffett for holding onto billions of dollars in cash and not deploying it in stocks. But Buffett was saving all that cash to be used when companies come down from the then astronomical valuations to more reasonable prices.
“Every decade or so, dark clouds will fill the economic skies and they will briefly rain gold. When a downpour of that sort occurs. It is imperative that we rush outdoors carrying washtubs and not teaspoons.” Warren Buffett
Investing Lesson 6: Never Invest Just Because a Company is Cheap
A cheap business may be cheap for a very good reason, but may not be a profitable or favorable investment.
His investing approach is to look at a business’s competitive advantage, intangibles like brand value, cost superiority and its strong growth prospects.
This goes hand-in-hand with his Buffett’s first rule of investing is “don’t lose money.” His second rule is “never forget rule number one.” In short, investors should try to avoid significant losses at all costs, but avoiding all losses is impossible.
“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” Warren Buffett
Investing Lesson 7: Time is The Friend of The Wonderful Business
Patience and time are important in investing and has investors can reap the benefits of compounding.
Additionally, “cash is king” and investors must avoid debt at all costs. Buffett has always had a strong net cash position. Cash gives optionality and means you’re unlikely to have to make hard decisions when the market becomes volatile and eventually turns.
Considering volatility, Buffett said, “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions are not immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”
Buffett is not a fan of the kind of debt that can leave consumers broke and helpless, especially when the markets go down.
“It is insane to risk what you have and need in order to obtain what you don’t need,” Warren Buffett
Investing Lesson 9: Keep It Simple
An element of simplicity is important. Buffett himself follows a simple to understand investing framework, which can best be defined as buying stakes in a business where the price you pay is far lower than the value you derive. He wants investors to invest in simple and understandable instruments only and using a process that one can easily digest.
For example, if you don’t understand cryptocurrency, don’t invest, trade, or speculate in Bitcoins or glamorous-looking investment vehicles we are exposed to every year.
“If you are uncomfortable with the asset class that you have picked, then chances are you will panic when others panic,” Warren Buffett
Finally, treat your body and mind like the only car you could have. If someone offered you the most expensive car in the world with a single condition that you never get another one, how will you treat this car?
With this analogy in mind, Buffett urges you to treat your body and mind the same way you treat your one, and only car. If you don’t take care of your mind and body now, by the time you are forty or fifty you’ll be like a car that can’t go anywhere.
Investing Bottomline
Buffett’s lessons are simple and straightforward. He submits to keep it simple, improve upon what you know, stay within your circle of competence and comfort zone, and there are enough opportunities for one to thrive in investing.
References:
- https://www.etmoney.com/blog/9-lessons-in-investing-by-warren-buffett/
- https://thetotalentrepreneurs.com/business-lessons-warren-buffet/
- https://addicted2success.com/life/5-lessons-we-can-all-learn-from-the-life-of-warren-buffett/
- https://finance.yahoo.com/news/5-warren-buffetts-most-important-224429018.html
Recession…recessions always come with significant increase in unemployment. It’s basically definitional. Employment and gross domestic product fall together during a recession.