We’d all love to emulate Warren Buffett — one of the most successful investors of the last 50 years. The 92-year-old has amassed a fortune worth over $100bn and earned himself the nickname, the ‘Oracle of Omaha’.
With the market looking increasingly uncertain, I’m looking to Buffett to show me the way forward. And, thankfully, he’s got a few lessons for us.
Let’s take a closer look.
Invest in quality
Buffett tells us to invest in quality stocks with sound business models. Mind you, he doesn’t overpay for these stocks. As a value investor, Buffett wants to ensure he’s getting a discount on what he sees as the intrinsic value of the stock in question.
Buffett once said in a letter to his shareholders, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
Don’t get comfortable with cash
In October 2008, Buffett wrote an article titled “Buy America, I am”, in which he discussed the dangers of getting too comfortable holding cash. “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value”.
There might be some uncertainty right now, but sitting on cash is a guaranteed way to see the value of my portfolio go down in real terms. That’s because inflation is still very high.
Uncertainty can have an upside
Buffett tells us that the future is always uncertain. He once said that uncertainty can be positive because it means long-term investors can buy stock in the knowledge that they’re not selling anytime soon. “Uncertainty is the friend of the buyer of long-term values”.
However, I’d caveat this by noting that the US market is looking expensive right now and there’s some expectation the market will fall this year. But in the UK, valuations are relatively low. The average price-to-earnings on the FTSE 100 is 14, versus 21 on the S&P 500.
I’m focusing on value stocks on the index. Banks, particularly those focused on the UK, like Lloyds, trade with price-to-earnings roughly half the index average despite performing well.
Don’t complicate things further
Uncertainty is all around us when it comes to markets. But Buffett tells us not to complicate things further by exploring areas of the market that are new to us. “Never invest in a business you cannot understand”, Buffett says.
Be in it for the long run
Buffett invests for the long run, and so should investors who want to follow his lead.
“Successful investing takes time, discipline, and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant”.
It’s about finding undervalued stocks, having conviction, holding them for the long run and even buying more when the share price goes down.