The stock market has been swinging wildly ever since we entered 2018. Compared to the historically calm 2017, 2018 is nowhere near calm. How would some of the best investors in the world manoeuvre through the volatility and uncertainty?
Warren Buffett is widely considered as the best investor in the world. The Oracle of Omaha has so much wisdom on the market that even 1% of his wisdom will help us become better investors. Here are five Warren Buffett quotes that he uses to help him make tough decisions (and make money) in times like this.
1. Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
Instead of thinking about how much money one can make, Warren Buffett’s first advice is to avoid losing any money. This might sound simple, but it is difficult to achieve, especially when the market is swinging so wildly.
This is because, if you were to lose 50% of your capital, you will need to achieve an investment return of 100% on your remaining capital to recoup those losses and break even. By avoiding losses, you stay clear of being on the backfoot. Apart from avoiding putting yourself in a disadvantaged position, having a loss aversion rule helps you maintain investment discipline. It helps you to stay discipline and avoid being trigger happy during investing. The result is that you only invest in companies that are worth investing in.
2. Price is what you pay. Value is what you get.
In order to be unaffected by market movements, you need to pay for value, rather than for price. It is important for you to first understand the distinction between price and value. For new investors, the line between price and value is often a blur. After all, they are the same, right? Apparently, to legendary investor Warren Buffett, they are not the same.
In the eyes of Warren Buffett, price is the amount that the seller is willing to part with the shares that he owns. For you as a buyer, your focus shouldn’t be on the price. Rather, you need to ask yourself about the intrinsic value of the shares you are purchasing. By having an estimate of the share’s intrinsic value, you can judge whether you have got yourself a share in the company at a steal or whether you have overpaid. You also avoid buying worthless companies at exorbitant prices.
3. It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
In the past, Warren Buffett used to be a true-blue value investor who was willing to buy ‘ok’ companies at a wonderful (read: cheap) price. He called these companies ‘cigarette butts’ which had one puff remaining. While they might not look nice, you could pick it up for free from the ground. This could give you one second of momentary pleasure.
However, as Warren Buffett gained more experience as an investor, he came to realize that the ‘cigarette butt’ approach wasn’t the best approach. His experience showed him that high-quality businesses trading at fair prices have so much more potential for capital appreciation than the ‘ok’ companies. Thus, rather than buying a fair company at a cheap price, he advocates buying a wonderful company at a fair price.
4. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
It is human nature to act with a herd mentality. Thus, there is a tendency for us to blindly follow the decisions that others are making. When amateur investors are investing in volatile markets, they tend to be led by the market, rather than thinking above the herd.
Yet, if you really want to become an outstanding investor and make alpha returns, you need to break free from the herd mentality. You need to make bold contrarian decisions to bet against the market at the right time. This is especially when you sense that the market is being overly irrational.
If you observe the market, whenever the market is doing well, investors have the tendency to become irrationally exuberant. As a result, the market becomes greedier and people are willing to take on excessive risks. In such situation, the right contrarian approach is to take precaution when you sense that the market is getting greedy. Vice versa, the other way is to invest when you sense that the market is depressing the prices of wonderful companies due to excessive fear in the market.
5. Our favourite holding period is forever.
Besides asking which shares to buy, another common question retail investors like you and I have is “When should we sell?”. Most experts do not have a definite answer for you because identifying the time to sell is an art, rather than science. However, Warren Buffett isn’t your average “expert” and he has the answer to the question of when to sell. According to Warren Buffett, you should NEVER think of selling, not even in a volatile market.
Think of it this way. Having spent so much effort to find the best company in the world, why would want to sell it away? If you were a shareholder of Google today, do you want to sell your shares in Google for a quick gain? Or would you rather buy more shares, hold on to them forever and let them appreciate with time?
That being said, it doesn’t mean that Warren Buffett adopts a buy-and-don’t-care approach. If the company no longer possess the right values that you bought it for, it should be sold, regardless whether you make a profit.