Warren Buffet, also known as the Oracle of Omaha is a legendary investor who dishes out sage wisdom for investment success on Wall Street. Warren Buffet’s annual letter to shareholders of Berkshire Hathaway has become an annual letter to the world. A simple online search of “Warren Buffet’s investment advice will yield tons of results providing different kinds of advice for new, intermediate, and experienced investors.
In some instances, too much information doesn’t do much good because the information overload could lead to inaction as people remain stuck in decision-making mode. Below are probably the three most important lessons that 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 somewhat hard 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’ll need to know how to conduct fundamental analysis and trust the outcome of your analysis enough to stay put even when other traders are running around like headless chicken.
More importantly, you need to understand that buying stocks means that you are buying part of a business. You should be more concerned about buying a great business at fair prices than at buying a mediocre stock at a great price. In Buffet’s words, “I view the stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their ‘chart’ patterns, the ‘target’ prices of analysts or the opinions of media pundits,”
2. Differentiate between price and value
Too many people have been indoctrinated with the “buy low sell high” investment wisdom to the extent that they only think about price when making investment decisions. Granted, buying something when it is selling at cheap price and selling at a higher price in the future sounds profitable. However, buying a stock because it is cheap today doesn’t necessarily mean that you’ll get 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 if 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 assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
3. There’s opportunity in both bull and bear markets
Wall Street follows an inevitable bear-bull cycle of famine and feasting. Anyone can pick a winner in a bull market, all you need to do is to buy a stock and wait, the bullish momentum will cause demand to outpace the supply and the price of your stock will increase. However, picking out 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 might offer an incredible opportunity to buy the stocks of great companies at a discount. In Buffet’s words, “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.”
Disclaimer: All trading involves risk. Only risk capital you’re prepared to lose.