Why widespread fear (not personal fear) is your friend as an investor
“If you stick around long enough, you'll see everything in markets,” remarked Warren Buffett, the legendary value investor known for his friendly demeanor, modest style of living, and remarkable ability to create wealth.
“And it may have taken me to 89 years of age to throw this one into the experience, but the markets, if you have to be open second by second, they react to news in a big time way.”
In an interview from his Nebraska headquarters, Warren called the coronavirus and plunging oil prices “a one-two punch” but said that the:
- October crash of 1987 was worse and the
- Market collapse in the fall of 2008 was much more scary, by far
Strategies of the Oracle of Omaha
Probably the most successful investor in history, Buffett is known as the “Oracle of Omaha” for his ability to predict an investment success through evaluating whether to buy or invest in a company.
In the more than five decades that Buffett has controlled Berkshire (since 1965), the company has rewarded shareholders with an average rate of return of 20.3% annually. During this same time, the S&P 500 has averaged 10.0% each year. The 89-year old Buffett doesn’t just beat the market – he smashes it.
But remember, Buffett is a value investor – a bargain hunter searching for stocks that are valuable but not recognized as being valuable by most other buyers. Thus, he can buy a company when it stock prices are unreasonably low.
Further, Buffett isn’t especially interested in how
the market treats his new stock. He chooses stocks based on the overall potential of the company to generate earnings. He buys and holds stocks and companies for the long term. His primary concern
is how well the company can make money for its shareholders.
Warren on Fear
Buffett outlined one of his beliefs in his 2017 Annual Shareholder Letter and it seems even more appropriate today.
He wrote that, “…you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy.”
Interestingly, Buffett wrote that statement as the DJIA came off of a winning year, returning over 13% in 2016 and on its way to returning over 25% for 2017.
Buffett’s value strategy requires patience, a long-term focus, and of course, buying low. The first thing to know about long-term, value investing: It’s very difficult to determine whether a company is undervalued by the market, with greater intrinsic worth than most investors see. To make good decisions, you have to be able to analyze a massive amount of financial data, the market for a company’s product, its management, and the future.
Recognizing this difficulty, Buffett advises other investors not to consider themselves “know-it-alls”.
He has said, “There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know nothing’ investor but you think you know something.”
Buffett will preside over Berkshire’s annual meeting on May 2, 2020 and it will be streamed worldwide by Yahoo.
Consider visiting https://finance.yahoo.com/ brklivestream and watching.
As Buffett said about wise planning for the future, “Someone’s sitting in the shade today because someone planted a tree long ago.”
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