Category: Lessons From Warren Buffett

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Lessons From Warren Buffett

Lessons From Warren Buffett: Here’s What to Pay Attention To

In the frenzied world of financial news, where the Dow can soar or plummet in the blink of an eye, it is the market’s capricious dance that captures the collective gaze. But should we, if we seek to walk in the footsteps of the legendary Warren Buffett, succumb to this tantalizing spectacle? The answer, resounds with a resolute “no.” For Warren Buffett, the stock market’s caprices hold little sway. To invest like Buffett is to look beyond the tumultuous fluctuations and fix one’s gaze upon the essence of individual businesses, where true value lies.

“Charlie and I don’t think about the market. And Ben (Graham) didn’t very much. I think he made a mistake to occasionally try and place a value on it,” Buffett explained at the 1999 Berkshire Hathaway annual meeting. “We look at individual businesses, and we don’t think of stocks as little items that wiggle around on the paper and have charts attached to them. We think of them as parts of businesses.”

Buffett’s full explanation on focusing on individual companies rather than the market

See the complete Lessons From Warren Buffett series

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Lessons From Warren Buffett

Lessons From Warren Buffett: You Can Go Broke Short Selling

A company’s stock price goes up and up, seemingly disassociated from any meaningful metrics of valuation. So, should you short it?

It may be tempting, but Warren Buffett advises against it.

“Short selling, it’s an interesting item to study because it’s, I mean, it’s ruined a lot of people. It’s the sort of thing that you can go broke doing,” Buffett explained at the 2001 Berkshire Hathaway Annual Meeting. “Being short where your loss is unlimited is quite different than being long something that you’ve already paid for. And it’s tempting. You see way more stocks that are dramatically overvalued in your career than you will see stocks that are dramatically undervalued.”

Buffett’s full explanation on short selling

See the complete Lessons From Warren Buffett series

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Lessons From Warren Buffett

Lessons From Warren Buffett: Hold a Stock Forever or Sell It?

Warren Buffett has said his favorite holding period to own a stock is forever, but often that gets misinterpreted as Buffett never sells. Nothing could be further from the truth. While it is true that Buffett’s massive positions in Coca Cola and American Express have been held for decades, he has sold numerous positions over the years, including his holdings in Phillips 66 and IBM, for example, and most recently he sold the large positions he built up in airline stocks, including American, Delta, United and Southwest, after COVID-19 impacted their prospects.

All things being equal, Buffett notes “It’s not their inclination to sell,” however, he sells stocks all the time.

What makes Buffett sell a stock rather than hold it forever?

One factor is whether the company has had a negative change in its competitive advantage.

“We probably had one view of the long-term competitive advantage of the company at the time we bought it, and we may have modified that,” Buffett explained at the 2002 Berkshire Hathaway Annual Meeting.

He went on to add: “That may mean that we were wrong when we made the decision originally. It may mean that we’re wrong now, and their strengths are every bit as what they were before. But, for one reason or another, we think that the strengths may have been eroded to some degree. A classic case on that would be the newspaper industry, generally, for example. I mean, in 1970, Charlie and I were looking at the newspaper business. We felt it was impregnable a franchise as could be found.”

If the stock you are holding has strong revenues, is cranking out dividends, and has a bright future, there is no need to set an arbitrary selling price. As Buffett once said, “The real thing to do with a great business is just hang on for dear life.”

However, if the company’s prospects are deteriorating, there is no need to hold it forever.

Buffett’s full explanation on when he sells a stock

See the complete Lessons From Warren Buffett series

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Lessons From Warren Buffett

Lessons From Warren Buffett: Don’t Pass Up a Good Investment Because of Negative External Factors

The trade deficit is up, unemployment is sky high, and Coronovirus is taking thousands of lives a day. Negative news with sweeping impact is coming out daily.

Should you integrate macroeconomic news into your investing strategy?

Warren Buffett says no.

“We don’t really pay attention to that sort of thing,” Buffett said at the 2004 Berkshire Hathaway Annual Meeting.

He went on to point out that “You could’ve sat down in 1974, when stocks were screaming bargains, and you could’ve written down all kinds of things that would have caused you to say, you know, the future is going to be terrible.”

As Buffett noted, the stock market has survived wars, pandemics, and all kinds of negative news.

“You know, the Dow went from 66 to 10,000-plus in the hundred years of the 20th century, Buffett explained. “And we had two world wars . . . . There‘s always problems in the future, there’s always opportunities in the future. And in this country the opportunities have always won out over the problems over time.”

So, don’t let the size of the federal deficit scare you out of making a well-researched investment in an individual stock.

Buffett’s full explanation of macroeconomic factors and investing

See the complete Lessons From Warren Buffett series

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

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Lessons From Warren Buffett

Lessons From Warren Buffett: Don’t Let This Error Take You Out of the Game

Warren Buffett is fond of baseball analogies. He’s often spoken about an investor being like a baseball batter waiting for the right pitch. He notes that the advantage the investor has over the batter is that there are no called strikes. You can wait for just the right pitch before swinging your bat. It is a straightforward concept, and speaks to the patience and discipline that good investors should have. However, there is a flipside to waiting for a great deal, and it is an error that Buffett warned about at the 2011 Berkshire Hathaway Annual Meeting. The flipside is thinking that every investment you make, every stock that you buy, has to be an absolute home run. You don’t want to let the search for the perfect investment be the enemy of the good investment.

“One of the things, one of the errors people make in business, and sometimes it can be a huge error, is that they try and measure every deal against the best deal they’ve ever made,” Buffet said. “So they say, you know, I made this wonderful deal for, maybe, an insurance policy written, or it might be a company bought, it might be a stock bought, and they’re determined that they’re never going to make a deal that isn’t that attractive in the future. So, they in effect, sometimes take themselves out of the game.”

For Buffett, it is all about the opportunities that are available to the investor at a particular time.

As Buffett noted, opportunity costs are different for every investment.

“The goal is not to make a better deal than you’ve ever made before. The goal is to make a satisfactory deal that’s the best deal you can make at the time,” Buffett explained.

See Buffett’s full explanation of opportunity costs as it related to five different Berkshire Hathaway investments.

See the complete Lessons From Warren Buffett series

© 2020 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.