Warren Buffett's Thoughts on Investing

Article written by Jennifer Black and Dedicated Financial Solutions.

Warren Buffett’s Thoughts on Investing

You’ve probably heard about the incredible success of investment guru Warren Buffett, and you may have wondered how he does it. Is it some kind of special genius? Does he spend his days immersed in stock market and economic information, spotting the trends and jumping on them before the rest of us can figure out what’s going on?

You may be surprised that Buffett’s success is a result of none of those things. In his February 2014 letter to the shareholders of his company, Berkshire Hathaway, Buffett shared some fundamental thoughts on investing. His approach is remarkably simple, and he’s careful to explain that you don’t need to be an expert to put his strategies to use in your own investment plan.

In fact, Buffett’s first tip, especially for non-experts, is to know you limitations. He advises that ordinary investors should “follow a course certain to work reasonably well. Keep it simple.”
Another key is to not focus on possible changes in the price of the investment you are considering – according to Buffett, that’s speculating, and none of us do that very well. Instead, consider the future productivity of the asset you’re thinking of investing in. If you’re thinking of buying shares, think about the company’s future earnings. Buffett advises, “If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it.” Looking to the future is important; an asset’s great performance in the recent past is no reason to buy it.
Buffett illustrates that point by describing an investment he made in a retail property in New York. In the past, the property had been poorly managed and rents were too low. Buffett’s group of investors didn’t worry about that because they were focused on what they believed the property could do in the future. Because the property was right beside New York University, they knew it could be more productive. They improved the management, filled vacant stores and raised rents as leases expired. As a result, earnings on the property tripled. If they had looked at past performance, they would not have invested in the property.

One of the most important points Buffett makes is that you should not allow yourself to be swayed by the constant noise we hear about markets, economics and financial predictions – especially when that chatter comes from the media. Buffett feels this barrage of information can cloud your view of what’s actually important. He points out that when he invested in the New York property, he didn’t worry about what interest rates, the economy or the stock market might do. He knew that the nearby university would continue to draw students who would continue to shop in his property’s stores.

Not only can the constant flow of information confuse ordinary investors, but it can also make them behave irrationally. When those around us are panicking and selling because of poor financial conditions, or buying frantically because others are making profits, for example, it can be very challenging to sit by and do nothing. But that’s exactly what Buffett did with his New York property. Despite the fact that after 2008 it was clear that a serious recession was coming, Buffett held onto his property. Market fluctuations can’t hurt you if you hold steady.

Buffett points out, in fact, that “tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing.” Why? Because this is when you should invest – when prices are low! A euphoric environment, when prices are high, is not the time to invest.

How do you pick good stocks? Buffett offers this advice. Do you think you could estimate what the company will earn over the next five years or more? If you can, consider buying if the price is reasonable. If you don’t think you can estimate the firm’s future earnings (and usually, this is the case), don’t buy. Again, don’t think about the economic environment or the latest market rumours. Don’t buy just because the market is rising and you want to be, as Buffett describes it, “where the action is.”

But how, you may be wondering, do you estimate a company’s earnings for the next five years? Few of us are experts in business prospects. Be reassured, Buffett says, that
the typical investor doesn’t need this skill. In aggregate, American business has done wonderfully over time and will continue to do so… The goal of the non-professional should not be to pick winners – neither he nor his ‘helpers’ can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well.

OK, so how do you find that cross-section of businesses? Again, it’s very easy: Buffett suggests an S&P 500 index fund. That’s it! Once you’ve made your investments, stick with them over the long term. Buffett warns against beginning to invest when the market is on fire – it’s easy to become disillusioned when things settle down and you see a “paper” loss on your investment. But as long as you hold onto it, the loss will remain only a paper loss. If you panic and sell on bad news, it will become a genuine financial loss.

Another of Buffett’s tips is to keep your investment costs low. The best way to do that is to resist the urge to be constantly buying and selling your holdings – and resist the urge to listen to advisors who constantly pressure you to make transactions.

These recommendations from one of the world’s most successful investors are not just what he thinks “ordinary” investors should do. He closes his comments on investing by describing one of the provisions he has made in his will to ensure that his wife is provided for: 90% of the cash he passes to her is to be invested in a low-cost S&P 500 index fund because he believes that’s the best way to secure solid long-term investment results. The same investment option is available to you. Call the professional investment team at Dedicated Financial Solutions to make it work for you.

Contact us today to review your portfolio and ensure it is on track to meet your goals.

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