Warren Buffett has never been shy about packing lessons for successful investing into his annual letter to shareholders. That letter is a treasure-trove of insight, presented in a folksy manner that is not only easy to read but incredibly entertaining.
With the market tumbling we’re all likely in need of a few doses of Warren’s unpretentious advice, so I dug through his past shareholder letters to find some gems that may help us navigate the current market drop and build a bigger nest egg for retirement.
Buffett is always hunting for great companies that he can buy for Berkshire Hathaway shareholders, but if he can’t buy the whole company, he’s OK with owning a smaller piece of it instead. Applying this advice to our own investments means spending less time considering how many shares of a company we can buy and more time figuring out where we believe the company will be in ten years. Doing that will help us avoid the pitfall of foregoing investments in great companies like Amazon AMZN 0.0671% ) or Priceline PCLN 1.4832% when they’re on sale to buy lower quality companies with smaller share prices.
Sure, the average annual return for the S&P 500 has been 8.14% over the past decade, but assuming that will be our return this year, next year, or any year is folly. Returns are volatile and will continue to be volatile, so we should focus less on the returns for any one period of time and instead focus on buying great companies and socking them away. Consider this point: While the S&P 500 has experienced plenty of fits-and-starts over the past 10 years, those who have owned it all along are up 103%.
Buffett avoids businesses whose future he can’t evaluate. Instead, he focuses on finding businesses that offer a predictable profit for decades to come. Taking the long-haul approach to finding great companies goes far beyond identifying the next big thing — after all, during the Internet boom there were plenty of Internet companies that soared on expectations rather than profit, and many of those companies have since gone bankrupt. Instead, we should be investing in companies we can understand that are likely to remain winners.
Warren’s cash stockpile is a thing of legend, and while that cash hoard holds back his returns in periods of growth, it also protects him when markets turn sour. Importantly, it also gives him the financial flexibility to take action and buy when prices are right. That plan-ahead mentality is something every investor can embrace by making sure there’s always some dry-powder around to deploy during the market’s inevitable declines.
Buffett doesn’t hesitant when he’s presented with an idea that hits the mark. He recognizes that he won’t be right every time, but he also believes that taking action is critical to realizing the potential of an opportunity. As investors, we can emulate Buffett’s approach by making sure that once we’ve done our due diligence and picked our favorite investments we take action and buy, regardless of the market’s short-term machinations.
Buffett keeps strictly to his investment discipline, but he also keeps an open mind to great ideas that fit into his strategy. Those ideas can come from various places. His acquisition of Clayton Homes, for example, was sparked by an autobiography of Clayton’s founder Jim Clayton which had been given to him as a gift by some University of Tennessee students. Keeping open to opportunities, regardless of their origin, may help us find worthwhile investments for the long term, too.
Buffett knows that emotion is a dangerous weapon that, if used incorrectly, can result in significant loss — and, if used correctly, can result in significant gain. Emotional reactions to surging or descending markets can make people buy when they should sell and sell when they should buy. Buffett often compares taking advantage of market slides to shopping for groceries. Last week on CNBC he summed it up by saying, “If you’re buying groceries, you like it when prices go down next week. And you like it if they go down further the next week.” Just as we like getting a good deal on the items at the grocery store we would be buying anyway, we should also be fans of getting a good deal on our favorite companies.
Buffett has no idea whether he’ll outperform the S&P 500 over the next year, but he does know that Berkshire Hathaway’s book value has grown a compounded annual 19.7% over the past 49 years. Similarly, we don’t know if our investments will outperform the market daily, weekly, or yearly, either. What we can feel pretty good about is the knowledge that investing in great companies like Coca Cola KO 0.5908% and Wells Fargo WFC 0.8571% — two companies that are long-standing Buffett holdings — may help put us on a path to a less-worrisome retirement.
http://time.com/money/3502243/warren-buffett-market-crash/
Created by Tan KW | Aug 29, 2024
Created by Tan KW | Aug 29, 2024
Created by Tan KW | Aug 29, 2024
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2014-10-26 08:07