Warren Buffett bought his first shares when he was 11 years old. In the 78 years since, he has in some ways become the figurehead of the investing world.
Through his letters to shareholders and interviews in the business pages, he has guided investors with some pearls of wisdom.
Here are some of the lessons we can learn from Warren Buffett.
When to be greedy
If you stop someone off the street and ask them the best strategy for investing, they’ll probably say “buy low, sell high.”
This is all well and good, but how do we know when the stock has bottomed out? Likewise, what’s to stop the share price gaining?
Buffett distilled this raw advice and added some clarity when he said: “be fearful when others are greedy, and be greedy when others are fearful.”
Buffett has made much of his wealth sweeping up chunks of fundamentally fantastic businesses when markets or stock prices have crashed.
Psychology of investing
Buffett owes some of his success to long-time friend and business partner, Charlie Munger.
Munger brought the psychology of economics to Buffett’s attention. Munger believed that human psychology could be just as important as economics when it came to investing.
Buffett has remarked that “every time I’m with Charlie, I get some new slant on an idea that causes me to rethink certain things.”
With this skill, Buffett can take a step back when the market over-reacts to a piece of news, and predict how investors will behave in the future.
Buffett’s favourite holding period is forever. Each investment is made as if he is buying the whole business. He lets the dividends build up, reinvests, and watches as his investment compounds.
Investments in the stock market tend to be most successful when a buy-and-hold strategy is used. Trading in and out regularly could see your transaction fees mounting up and eradicating some of your savings.
It’s important to remember why you bought the company in the first place.
Margin of safety
Buffett has said that the three most important words are “margin of safety”.
This means that he will only buy something for less than it’s worth. He wants to make sure that he is paying a price that is below the business’ intrinsic value.
Similarly, a bank would not want to lend money to someone who can only just manage to repay the loan each month. In the calculations will be a cushion in case circumstances change slightly.
Buy a wonderful company at a fair price
When I’m struggling to find value in the market, these words from Buffett always rattle around my brain: “it is better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
If customers have a real need for a company’s products, the business has a competitive advantage over its peers, and it is managed by good people, then I become more relaxed about the price, and would possibly accept a lower margin of safety.
As Buffett has said: “price is what you pay, value is what you get”.
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T Sligo has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019