Warren Buffett is often hailed as the most successful investor ever. His stellar track record means analysts cling to every word he says. And with over 50 years of market experience, he has given us some memorable lessons on how to be successful. Although he has faced flak recently for his stance on cryptocurrency from new-age gurus, some of the most successful modern investors swear by his methods. And personally, I have learned a lot from the simplistic approach that has made Buffett the success he is today.
A lot of guides and analytics tools involve complex algorithms that read chart patterns. But as an investor working with limited capital with a goal of maximising savings, spending time looking at retracement zones and momentum indicators make little sense to me. I find that it also takes me away from looking at the fundamentals of a company and the potential of the sector it operates in.
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The current market volatility and fluctuations can be frustrating. But looking at these nuggets of wisdom from the big bull himself helps me cut through the clutter.
#1 Most news is noise, not news
In an age where our news feeds are designed to engage, it is often a few outlandish and brash investing tips that gain attention. And this leads to reactive investors who buy into small market developments and fail to look at the big picture. It is very easy to get caught up in the ‘next big stock’ claim. And Warren Buffett’s tip warns investors of the perils of listening to pundit claims instead of relying on one’s own fundamental analysis.
The story of Facebook’s big rebrand into Meta Platforms in October last year is a great example. The move generated a lot of excitement and it was hailed by many as the next big step for big tech. Many investors I spoke to were first exposed to the metaverse after this move by Mark Zuckerberg. But people who have been following the development of the metaverse knew that Facebook was not the pioneer. The company is just one of the many tech giants looking to conquer the virtual reality world.
And a lot of people invested in Meta in late 2021 purely on the hype without looking at the fundamentals. The social media platform’s growth has been stagnant in recent months. The company saw a drop of half a million global daily users for the first time in 18 years, losing out to newer companies like TikTok. And I think the company will go through challenging times with its lofty ambitions for the virtual world.
The Meta stock is down 35% so far in 2022. And although it remains one of the largest traded companies in the world, people who invested after the Meta rebrand have taken huge losses. The business will likely recover from this downtrend, but recent investors could have timed their move better. This serves as a reminder that news is just a starting point for research and investors should always look at the big picture.
#2 The best holding period is forever
This old Warren Buffett adage is something the Foolish investing method stands by. Investing with long-term goals in mind helps create positive habits. And after a turbulent 24 months for the market, I have learnt to zoom out on charts of stocks in my portfolio and look at growth over the last decade. This has helped me hold onto shares that I otherwise would’ve sold in the fear of losing out on profits.
Picking companies with a steady revenue history and a large market share is a tested investment strategy. Buffett calls this the invest-and-forget method. And I think this can be extremely rewarding for investors who are not actively looking at market movements daily.
Many FTSE 100 shares have risen substantially in the last decade and continue to grow despite major setbacks in the last two years. Had I invested in UK giants like AstraZeneca and Ashtead Group in April 2012, my investments would be up 300% and 1,800% respectively. And both these companies operate in evergreen sectors and are proven market leaders that I have been bullish on.
Although this strategy is not for everyone, it is a great way to look at portfolio building and investing with the goal of steady returns in mind. Investors with the idea of getting rich quick often fail, which is what Warren Buffett tries to highlight.
#3 Know the difference between price and value
The stock price of a company and the value it offers could differ greatly. “Price is what you pay. Value is what you get,” is a great Ben Graham quote that Warren Buffett has used and espoused through his time as Berkshire Hathaway’s CEO. And this is a very useful tool to have in a turbulent investing environment.
Buying a quality stock when it crashes is a very common investing method, but something that new investors learn only through mistakes. This advice stems from knowing the intrinsic value of a business and its potential. Understanding the difference between share price and the value it can offer is the core principle of value investing.
And to pick an undervalued share, investors look at its intrinsic value, management quality, and the potential of the industry. A tool I use every day to judge the intrinsic value of a company is the price-to-earnings (P/E) ratio. It is simply a measure of its current share price relative to its earnings per share (EPS). And a common rule of thumb is that a stock is undervalued when its P/E ratio drops below 20.
Although this is not a hard-and-fast rule, it is an easy way to judge the current market position and time your long-term investments well.
These lessons have helped me stay calm and tackle volatile market conditions this year. And I think even seasoned investors could use Warren Buffett’s golden lessons to look at their portfolio differently even after a crash. History teaches us that businesses with strong fundamentals almost always rise above turbulence in the long run. Although these are universal lessons, a timely reminder from the Oracle of Omaha goes a long way.