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Seek to buy quality stocks, as well as other assets, at a discount

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One of the ways to learn from Buffet is by looking into what he has said about investing. Below, we present and analyze some of his comments. If you missed the first part, you can always return to our previous article about Warren Buffet.

 
“If a business does well, the stock eventually follows.” 

If you invest in a stock of a good company that’s currently depressed, it will likely recover. Note that Buffet likes to buy companies below their intrinsic value (at a discount). On the other hand, buying an overpriced stock in a great company isn’t the way to invest: All the good news are already priced in.

 

"The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they're on the operating table."

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“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” 

That’s the essence of Buffet: Buying good things below their intrinsic values. Opportunities like that present themselves once in a while, most recently in the early 2009 when great companies were trading at discounts due to a financial panic of late 2008. That’s when deals were grabbed.


"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.”

This is what the Oracle of Omaha has been doing throughout the decades. Buffet even said that he doesn’t buy technology stocks because he doesn’t understand them. In late 1999, when tech stocks reached enormous valuations, there were voices that Buffet is wrong not to buy into technology. Soon after, NASDAQ hit 5000 mark, only to fall tremendously in a short time. It took a decade and a half for the index to recover to that level, while many of then high-flying technology companies went out of business.


“Buy companies with strong histories of profitability and with a dominant business franchise.”

Buffet not only bought companies at attractive valuations, but he also made sure the companies have proven themselves. By dominant business franchise, Buffet refers to companies whose business model, or product, gives competitive advantage that can’t easily be taken away. An example includes Coca-Cola.

 
"I am a better investor because I am a businessman, and a better businessman because I am an investor."

We should think of investing as a business. When you buy a stock, you make a bet on a company, which you now partially own. Investigate the business, understand its financial position, competitive advantage, competitors, product or service, and management’s strategy.


“By periodically investing in an index fund, the know-nothing investors can actually outperform most investment professionals.”

Only few can analyze companies as well as Buffet. For those who don’t know much about investing, index funds are a viable option. In this statement, Buffet tells what is often true: Many professional money managers don’t do better than the market. Here, the theory of efficient markets applies.

 
“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”

The Oracle of Omaha concentrated his holdings, often being invested in only few companies. And he made some huge bets on them. Even then, he didn’t put all his eggs in one basket. When it comes to investors who aren’t overly sophisticated, diversification is advisable. Mutual and index funds, as well as ETFs, are ways to do it. It is important to diversify into more than one or two asset classes (not only stocks but other assets such as real estate, precious metals, fixed income, etc.).


“Anything can happen in stock markets and you ought to conduct your affairs so that if the most extraordinary events happen, that you’re still around to play the next day.”

Truth is that investing in stocks in a risky business. Even when you hold many stocks, there’s a systematic risk that can’t be diversified. When the market goes down a lot, most stocks decline. Make sure you don’t risk so much that you’ll be out of business. 


"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

Despite the risk, Buffet still believes in the market and that it can generate good returns. So far, history has proven it right.


“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”

Stock market investing is for those who can withstand the pressure that comes from declines. Remember: Never risk more than you can afford.


Summary:

  • Invest in what you understand, otherwise go for Mutual or Index Funds​
  • Wait to buy quality at a discount
  • Treat investing as your own business​

Warren Buffet’s Investing Wisdom- Part II


We continue the coverage about Warren Buffet’s investing wisdom. Buffet, also called the Oracle of Omaha (after his hometown in Nebraska), has been one the greatest investors in the world for the past several decades. Many say he is the greatest ever.