3 Important Investing Lessons from Warren Buffett

Published 09-MAR-2017 12:04 P.M.

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3 minute read

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Warren Buffett

The investor so prosperous that his name has become synonymous with successful, long-term, value investing. Indeed, if you had purchased $US1000 in Berkshire Hathaway (Buffett’s company) stock when he first bought it in 1964, your investment would be worth more than $US12 million today.

Unsurprisingly, much is written about his methodology, and how he has been able to achieve such terrific outperformance, for such an extended period of time.

Of course, it should be noted that markets fluctuate and past performance is no guarantee of future performance. Investors should always seek professional financial advice before making an investment decision.

Helpfully, Warren often explains his investment approach, dropping small bits of wisdom for us mortal investors to disseminate.

  1. Overcome your fears and take advantage of market capitulation

Buffett has previously stated that “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.”

This is a classic contrarian viewpoint, expressing the view that the biggest of investments should be made when economic downturns are at their worst; when prices are at their lowest. Although this sounds like an easy bit of advice to follow, it requires both patience and courage, with an investment outlook longer than most are willing to consider.

  1. Spending more for investment advice and management is not a ticket to wealth

Buffett believes that “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.”

Here he expresses the view that if you purchase an indexed fund, you will outperform a hedge fund due to the fees and charges of the hedge fund. He is not saying that an index fund will achieve better returns than an exceptional money manager, only that those same money managers will underperform net of fees.

  1. “Price is what you pay; value is what you get”

Buffett wrote this famous bit of advice in the 2008 Berkshire Hathaway shareholder letter; it highlights his subscription to the value school of investing. He is telling us to look past the ticket price of an investment, to assess the intrinsic value of the investment, which he defines as “the cash that can be taken out of a business during its remaining life.”

Whilst intrinsic value is not necessarily easy to calculate, it is important to estimate, to be able to assess the level of under or overpricing of a particular investment, relative to others. In fact, Buffett believes that intrinsic value estimations offer “the only logical approach to evaluating the relative attractiveness of investments and businesses.”

Although Buffett’s advice is coveted by the wider investment community, his advice is targeted towards individual, private investors. He is a firm believer in taking control of your own money and investment decisions, because he sees this as the most efficacious way to manage money. To those willing to control their own money, he has some advice:

“The years ahead will occasionally deliver major market declines — even panics — that will affect virtually all stocks. No one can tell you when these traumas will occur ...During such scary periods, 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. It will also be unwarranted.”

  1. It should be noted that broker projections and price targets are only estimates and may not be met. Also, historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may or may not be replicated. Those considering this stock should seek independent financial advice.


General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

Conflicts of Interest Notice

S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

Publication Notice and Disclaimer

The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.

This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.

 

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