Three key lessons investors can learn from Warren Buffet
Warren Buffet, also known as the Oracle of Omaha, is a legendary investor who dishes out wisdom for investment success on Wall Street. Warren Buffet’s annual letter to the shareholders of Berkshire Hathaway has become an annual letter to the world. A simple web search for “Warren Buffet’s investment advice will yield tons of results that provide different types of advice for new, intermediate and experienced investors. In some cases, too much information doesn’t do much good as the information overload can lead to inaction as people remain stuck in decision-making mode. Below are probably the three most important lessons investors can learn from Warren Buffet’s long and illustrious investment career.
1. There’s more to stocks than tickers, charts and patterns
Many new Wall Street investors find it a bit difficult to know the difference between trading and investing. An investor has a long-term view in mind and they are not often concerned about short-term fluctuations in stock prices. To be a successful investor, you need to know how to do fundamental analysis and trust the outcome of your analysis enough to stay put even when other traders are running around like a chicken without a head. More importantly, you need to understand that buying stocks means buying a piece of a company. You should be more concerned about buying a good company at reasonable prices than buying a mediocre stock at a good price. In Buffet’s words, “I see the stocks Berkshire owns as interests in companies, not as ticker symbols that can be bought or sold based on their “chart” patterns, analysts’ “target prices” or the opinions of media pundits.”
2. distinguish between price and value
Too many people have been indoctrinated with the investment wisdom of “buy low sell high” to the extent that they only think about price when making investment decisions. Sure, buying something when it is selling at a cheap price and selling at a higher price in the future sounds profitable. But buying a stock because it’s cheap today doesn’t necessarily mean you’ll be able to sell it at a higher price tomorrow. Instead of thinking about investments in terms of price, Buffet encourages investors to think in terms of value. To determine whether a stock is valuable, Buffet suggests looking at the sustainable impact of its underlying business. In Buffet’s words, “the key to investing is not to assess how much an industry will impact society, or how much it will grow, but rather to determine the competitive advantage of a particular company and, above all, the sustainability of that advantage. “
3. there are opportunities in both bull and bear markets
Wall Street follows an inevitable bear-bull cycle of starvation and feasting. Anyone can pick a winner in a bull market, all you have to do is buy a stock and wait, the bullish momentum will cause demand to outstrip supply and the price of your stock will rise. But picking winners in a declining market is much harder and many people eventually lose all the gains they had accumulated from the previous bull cycle. For the sophisticated investor, you can find ways to make money when the market is trading up, down or sideways. If you take Buffet’s advice to “be greedy when others are fearful,” a bear market can offer an incredible opportunity to buy shares of large companies at a discount. In Buffet’s words, “the best thing that happens to us is when a good company gets into temporary trouble. … We want to buy them when they’re on the operating table.”
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