5 lessons ordinary investors can learn from Warren Buffett
On May 4, 2019, Berkshire Hathaway held its annual meeting. Each year Nebraska welcomes tens of thousands of investors looking to pay homage to billionaire Warren Buffet also known as the “Oracle of Omaha.” In this month’s article, we figured we’d save you the trip and give you the top five lessons from Warren Buffet that will help you become a savvier investor.
"Be greedy when others are fearful, and fearful when others are greedy."
During the Great Recession of 2008 Buffet shouted this from the rooftops amid widespread fear and plummeting markets. While others were pulling their money out, Buffet kept on buying. His reason was based on the historical data demonstrating that stocks are cheapest when fear is running high.[i]
When markets are going down, even high-quality companies are seeing dropping stock values. Buffet swoops in and buys up this quality stock at below value and then is able to store up cash to do it all over again when the next downturn comes along.
Don’t do what you don’t know
"To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers," Buffett wrote. "The finding may seem unfair, but in both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult."
What this quote suggests is that investors stick with what they know. Sage and obvious advice.
"Buy into a company because you want to own it, not because you want the stock to go up."
While it may seem obvious, many investors don’t look at their stock ownership as direct ownership of an actual company, but that is exactly what you are. Just as you own your house or your car, you own part of a company. Just as you care for and maintain your home because you want it to last you a long time, you should invest in a stock because you truly believe that the business you are buying into as value and potential from long term success.
Patience is a Virtue
"The stock market is a device for transferring money from the impatient to the patient."
It should come as no surprise that Buffet is no fan of fads or get rich quick schemes. People are often tempted to follow the latest claims of how, when or what to buy to achieve massive growth in the shortest period of time. People are convinced that there must be some big secret that can game the market system and be able to predict the future and that some must be closer to it than others. The reality is that we all of one thing in common as investors: we cannot see the future and there is no crystal ball. But, if you are patient, you buy low and sell high, and if you don’t let fear make your decisions for you, then you are operating in a buffet-like manner.
You don’t have to have an MBA to be a good investor
While Buffet spends his days staying on top of all of the information to make complex decisions about which businesses to buy and what criteria there is to make the determination of their future earning power, he says “the typical investor doesn't need this skill. Just invest your funds in a low-fee index fund tracking a broad cross-section of businesses”.
Taking a relatively passive and “un-fancy” approach to your portfolio is advisable for the majority of investors. According to a CNBC article Warren Buffet has the following advice for his wife’s trustee in the event of his passing: Invest 90% in a low-cost index fund that tracks the S&P’s 500 Index.[ii]
So, there you have it. From the Oracle of Omaha. You don’t have to make things more complicated than they are to invest and grow your portfolio. It’s tax liabilities and spend-down plans that are the trickier part. And, if you need advice on how best to allocate your assets, withdraw your funds or minimize your tax burden, then you should give us a call. It’s what we do.
About the Author
As co-founder and Chief Investment Officer, Mike brings real-time investment management experience to clients. Prior to forming FC Wealth Solutions, he spent 15 years working on Wall Street as a trader and portfolio manager for some of the industry’s most well-known firms. His previous experience at Morgan Stanley, Royal Bank of Canada and Hutchin Hill Capital gave his valuable experience in institutional money management. His focus on continual research helps him identify macro trends and strategic investments for client portfolios. His research has enabled him to develop many of the rule-based investment strategies the firm uses for managing client assets and monitoring the markets.