Want to know the biggest reasons that you should take Warren Buffett’s investing advice? It’s simple; if you had purchased a $10,000 stake in Berkshire Hathaway back in 1965, you’d have approximately $80 million right now.
Over the last almost 50 years the man has been practically infallible and, in a recent annual letter to his stockholders, the master investor explained how he’s able to do it, and how others can do it as well.
One of his biggest pieces of advice is simply to stay as liquid as possible. In his annual letter Buffett wrote that “we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses.”
His advice was also that, when everyone else is selling, it might be just the perfect time to buy. “We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. . . . Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble,” he wrote.
On the other hand, Mr. Buffett also believes that, even when everyone else is buying, there sometimes no good reason to join them. “Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance,” he wrote. In other words, patients is definitely a virtue. If you’re going to buy when all others are selling, you also have to have been the person that held back when everyone around you was buying.
Buffett also believes in buying stocks that have real value, and then holding onto them for the long run. “In the end, what counts in investing is what you pay for a business — through the purchase of a small piece of it in the stock market — and what that business earns in the succeeding decade or two,” he wrote in his letter.
One of Buffet’s best pieces of advice is to be wary of stocks that you can’t evaluate, no matter how big their growth may be. He reminded investors that he and Charlie Munger, vice-chairman of Berkshire Hathaway, “avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be.”
If you look back at history his advice is quite sound. Anyone who invested in 1910 in the quickly growing automobile industry, or in 1930 with airplanes and 1950 with televisions, fared very poorly even though all three of those products completely changed the world. In other words, just because a company’s stock is seeing dramatic growth doesn’t mean that high profits and returns on capital are going to be the result.
Another gem from Buffett is to understand exactly what you own. Buffett wrote that “Investors who buy and sell based upon media or analyst commentary are not for us,” adding that “We want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur.”
One last bit of advice that the master offered to his pupils was basically that, as in the NFL, defense usually beats offense. “Though we have lagged the S & P in some years that were positive for the market, we have consistently done better than the S & P in the 11 years during which it delivered negative results. In other words, our defense has been better than our offense, and that’s likely to continue.”