Opinion: Warren Buffett’s Folk Investment Tips Are Exactly What You Need In This Hostile Stock Market
Individual investors are back. Throughout 2021, they have directly invested billions of dollars in US stocks and real estate. But these assets are now valued at worrying levels and fears of a correction are fueling volatility. Rising inflation, taxes and public debt in the United States present systemic challenges. Political and social discord reigns. And there is COVID.
In the face of such turbulence, individual investors are hungry for advice. There are few better sources than BRK.A of Berkshire Hathaway,
Warren Buffett, renowned for an unparalleled investment track record over six volatile decades as well as for his wise and accessible advice to investors. On point is this gem from 1994:
“Thirty years ago, no one could have foreseen the enormous expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow Jones by 508. points, or Treasury bill yields fluctuating between 2.8% and 17.4%. But, surprise – none of these successful events made a dent in [fundamental] investment principles.
As unprecedented as these times may seem, from angst to innovation, another Buffett gem reminds us that we’ve been here before. In 2018, Buffett again wrote about how the fundamentals of investing are timeless:
“Since 1942 … the country has repeatedly faced a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a widespread collapse in real estate values, a crippling financial panic. and a host of other problems.
Buffett has always believed that the fundamentals of investing remain intact even in the face of financial fads or innovations, from the tech bubble of the late 1990s to stock memes or social investment funds today.
The fundamentals of investing are brought together in homemade, humorous essays Buffett has been writing for shareholders of his company, Berkshire Hathaway, for six decades. Since 1996, with the support of Buffett, I have published a collection of the best of them, representing a complete, non-repetitive and compact mini-course useful for any individual investor.
In this year’s essay, Buffett warned of the dangers of investing by individuals, especially now in a time teeming with “promoters” telling “stories” that create “illusions” for the gullible. I am thinking of PSPCs, ETFs, ESG funds and other trendy offerings. Buffett cautions against “speculators” peddling “enticing ideas” and “calls to action” that “never stop”.
Buffett advises to avoid such decoys. In contrast, he uses two examples from his own investing experience to emphasize the appeal of common sense, simplicity, and business orientation to investing. Examples are his investments in a farm in Omaha (in 1986) and an apartment building in New York (in 1993) in which he has achieved disproportionate returns by adhering to a few fundamentals.
First, Buffett has long said that the three most important words in investing are “margin of safety.” He refers to the phrase coined by his mentor, Benjamin Graham, who pointed out that investment opportunities arise when price is below value. Buffett bought the farm from a bankrupt banker and the building from a government receiver. They were enthusiastic sellers offering low prices given the market conditions. The search for such security is particularly important in today’s high-priced markets.
Second, Buffett says “keep it simple” and “don’t swing for fences.” He is not an expert in agriculture or real estate. But he understood enough to estimate the income and expense of these assets over a ten-year holding period. Buffett estimated a return of 10%, which he considered reasonable for moderate risk. In fact, these two investments have seen their profits triple their estimates and their value quintupled. If you keep it simple – that is, invest in things that you understand – all you need are basic skills to comfortably make economic estimates.
Finally, Buffett advises to “concentrate on the playing field, not on the scoreboard”. By this he means studying the asset and the associated business prospects rather than any market price. In stocks, for example, focus on the value of expected cash flows over the next 10 years, not today’s closing price; for an office building, focus on the value of the expected rents, and not on the selling price of the building at the bottom of the block.
Individual investors know that investing is not easy and that rough waters can make things uncomfortable. Following the fundamentals helps, as does the perspective the story offers.
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group and editor, since 1997, of “The Essays of Warren Buffett: Lessons for Corporate America”. Cunningham owns shares of Berkshire Hathaway. For updates on Cunningham’s research on quality shareholders, sign up here.
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