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24/7 Wall St. Insights
- Warren Buffet chooses company stock based on their overall potential.
- He suggests to wait before you invest, allowing the stock to reach "reasonable valuation."
- When stocks falter, don't sell, buy.
- Also: 2 Dividend Legends To Hold Forever
Investing often appears to be a complex game that was historically accessible only to the world's wealthiest individuals. However, Warren Buffett, one of the most successful investors in the world, dispels this myth and offers a wealth of financial wisdom for the investor at any level. One of the cornerstones of his approach is his commitment to long-term investing. Also, as the market fluctuates, Buffett recommends that investors stay the course and ignore the short-term fluctuations. It is essential that an investor does not base his investment decisions on the daily activity of the market. To read more solid advice from "The Oracle of Omaha", check out this article on Warren Buffett's advice for 20 year olds.
Why Are We Covering This?
Contrary to popular belief, investing can be learned.
Investment is the cornerstone of business growth and sustainability. By applying Warren Buffett's proven and time-tested investment principles, businesses can make more informed decisions when considering new ventures and investment opportunities. Investing wisely can also mean diversifying assets, protecting the company during economic downturns.
1. "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."
Practical wisdom in investing is more important.
- Good investing decisions require patience.
- It also requires sound decision-making.
You Don't Need a High IQ to Win at Investing
Focus on learning the basic investing principles.
High IQs are not the best indicators for success in the investment world. Investment success only requires two things: understanding fundamental investment principles and a lot of discipline. This underscores the idea that investment success is accessible to anyone who applies these investment principles. It's about being consistent and making rational decisions. Possessing an extraordinarily high intellectual prowess is simply not required.
2. "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."
If a company is solid and simply facing some temporary setbacks, go ahead and buy their stocks.
- Buy when a company is under stress.
- This entails their stock prices will be lower.
Seek Great Companies Experiencing Short-Term Challenges
Usually, these issues are not permanent and the potential for long-term success is there.
Buffett would never advocate purchasing stock from just any company due to its deeply discounted price. Instead he encourages investors to buy stocks from good companies that are suffering from temporary setbacks. Good companies have solid business models and have the potential to grow to a sustainable level. When they face an economic or market setback, their stock prices will temporarily falter, indicating a good opportunity to buy. When these companies recover, the investor will experience the gains of these purchased stocks.
3. "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."
Buy and hold quality companies for the long-haul.
- This highlights Buffett's preference for a long-term strategy.
- Quality companies will continue to grow.
Have a Long-Term View on Investing
Avoid buying and selling stocks frequently.
This quote solidifies Buffett's belief in holding onto a stock for the long-haul. If a company is of high quality and it also has an exceptional managerial team, Buffett has no qualms about keeping his investments with that company for a long-time. With these two bedrocks in place, he is confident that the company will continue to grow and continue to create value over time.
4. "The stock market is a no-called-strike game. You don't have to swing at everything – you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'"
Investors can and should choose to wait.
- Be Patient.
- Remain Disciplined.
In The Stock Market, There is No Penalty for Not Swinging
Wait for opportunities that align with your investment strategy.
Just like a baseball batter isn't required to swing at every pitch, an investor does not have to invest in every new opportunity that presents itself. As a wise investor, you can wait until an investment comes along that is perfectly aligned with your criteria and demonstrates a solid potential for future success. Although money managers might be under pressure to make an investment in the latest shiny object, Buffett discourages this action. Instead, it is best to exercise both discipline and patience, ensuring that the investment potential ticks all the necessary boxes.
5. "Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get.' Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down."
Determine the difference between price and value.
- Always buy high quality items.
- Always buy at a lower price.
Buy High Quality, at a Low Price
Take advantage of opportunities where valuable assets are undervalued temporarily.
According to Buffett's mentor, Benjamin Graham, there is a clear distinction between the price and value of something. The price is the amount of money you spend on an item in order to purchase it, while value is the quality and the benefits you receive from owning that purchase. Buffett is clearly a value shopper. Whether he's buying a pair of socks or buying a new stock, Buffett will always seek to purchase an item of the highest quality at the lowest possible price.
6. "I am a better investor because I am a businessman, and a better businessman because I am no investor."
Experience in running a business can make you a better investor.
- Experience in business allows you to determine how businesses operate.
- It also helps to evaluate potential investments.
Approach Investing with a Long-Term Perspective
Don't focus on short-term, speculative gains.
Clearly being a business person has contributed to Buffett's success as an investor as one discipline informs the other. As a businessman, he is able to evaluate a company's management and competitive position. As an investor, he is able to identify value as well as make decisions that are based on the long-term potential of that business. Approach a business with an investor's mindset also ensures the efficient allocation of resources as well as managing risk.
7. "Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it's the lack of change that appeals to me. I don't think it is going to be hurt by the Internet. That's the kind of business I like."
Seek companies that are not overly involved with the rapid changes in technology.
- Invest in predictable businesses.
- Invest in stable businesses.
Choose Businesses That Thrive on Stability
Stable companies are more likely to experience long-term growth.
While many corporations are pouring profits into innovative efforts, Warren Buffett remains a steadfast advocate for the enduring power of steady growth. Unimpressed by flashy technological advancements, he instead prioritizes companies with consistent demand and reliable earnings. For Buffett, slow and steady ultimately wins the race. As a prime example, he mentions the enduring legacy of Wrigley's chewing gum and its largely unchanged way of doing business. People still buy gum and there is really no need to seek innovative technology to improve upon it, which means it is very much a stable investment.
8. "Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway."
Interesting that wealthy investors seek financial investing advice from those not as wealthy.
- Financial success doesn't equate to financial wisdom
- Investment knowledge comes from knowing the fundamentals.
Focus on the Quality of Financial Advice, not the Financial Status of the Financial Advisor.
Finance knowledge does not correlate with personal wealth.
The irony that Buffett is relating here is the fact that the ultra-rich still seek financial advice from those who are not as rich. This indicates that those who possess great wealth do not necessarily possess the financial wisdom necessary to make sound investments. They actually seek this wisdom from those who have more modest means. In the end, it's about learning and applying the basic fundamentals in investing in order to avoid being swept away by current market trends.
9. "Time is the friend of the wonderful business, the enemy of the mediocre."
Businesses that adhere to solid fundamentals are more likely to grow over time.
- Good businesses get stronger over time.
- Good businesses get more successful over time.
Look for Businesses That Have Demonstrated Sustainable Growth
The passage of time benefits high quality businesses.
When it comes to businesses and investments, Buffett is all about seeking the best in quality. A quality business will already be built on a solid foundation, with a robust business model, with competitive advantages, and an exceptional managerial team. These are critical elements that will no doubt, propel the business and sustain the growth of that business over time. However, when it comes to a mediocre business, the opposite applies. A mediocre business that is lacking in these elements, which will inevitably reveal itself over time, will be lose business and customers.
10. "The stock market is designed to transfer money from the Active to the Patient."
Focus on the value of the company.
- Stock market favors the patient.
- There is very little value in being an active investor.
The Stock Market Rewards Those Who are Both Patient and Disciplined
Allow time to compound your returns.
Contrary to a pervasive, popular belief, aggressive investors who constantly chase new opportunities often underperform those who adopt a more patient, long-term approach to investing. This is why Buffett is so evangelical in his approach with long-term investing. Trying to capitalize on short-term fluctuations is not sustainable. That is why Buffett encourages investors to buy good, quality stocks, knowing that their value will outpace the flash-in-the pan types of companies that will ultimately fail for lack of possessing the fundamentals.
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