The investment process is usually smooth sailing, but at times, you may encounter speed bumps.
The market is currently grappling with the twin worries of high inflation and surging interest rates.
These worries have dampened sentiment and caused the valuations of growth companies to tumble.
Even REITs are experiencing headwinds as they are pummelled by higher operating expenses and finance costs.
During times of volatility, it’s useful to take a step back and reassess the situation.
Warren Buffett is well-known for being a steady, prudent investor that has done well through good times and bad.
Here are five lessons that you can learn from this veteran investor that hopefully can assist you in your investment process.
1. Invest in what you know
It’s important to keep things simple when investing and to avoid complex situations that you cannot understand well.
When it comes to parking your money in businesses, there is a wide variety to choose from.
If a business appears too complex or if you do not understand how it makes its money, it’s best to avoid it.
A good example of an easy-to-understand business is Q&M Dental Group (SGX: QC7), which provides a comprehensive range of dental services through its network of clinics in Singapore, China and Malaysia.
Another is Sheng Siong Group (SGX: OV8), a retailer with a network of 67 supermarkets across Singapore.
By sticking with familiar names and a business model that’s easy to comprehend, you can also better track the business and how your investment is performing.
2. Be greedy when others are fearful
Emotions tend to get the better of us when money is involved.
And in the stock market, it’s not uncommon to hear of substantial sums being deployed into a portfolio of companies.
When times are bad, a market selloff may ensue and cause share prices to tumble across the board.
Buffett is crystal clear here when he says “Be greedy when others are fearful”, meaning that you should look to buy stocks cheaply when others are headed for the exits.
During periods of panic selling, some businesses may become too cheap to ignore.
Of course, you need to ensure the stock has a strong franchise and that it can recover from its troubles.
Once you identify such a bargain, you should welcome it with open arms instead of feeling fearful and worried.
3. A long-term approach
Buffett is well-known for his long-term buy-and-hold approach.
Remember that in the short run, a business may face all kinds of challenges and headwinds that may cause its revenue and profit to fluctuate wildly.
Macroeconomic factors, recessions, and inflation also play a part in dictating a business’s fortunes.
But if the business enjoys a strong brand franchise and has characteristics that endear customers to it, then it can enjoy steady growth in the long term.
One good example is Apple (NASDAQ: AAPL).
The company that invented the iPhone and iPad has faced a litany of issues over the past five years from snarled supply chains to weak demand for its flagship products.
Yet, if you had held on to Apple’s shares since April 2018, you would have quadrupled your money in the technology company, not counting all the dividends you would have also received along the way.
4. Ignore economic forecasts
Economic forecasts may sound important, but Buffett has a good quote when it comes to relying on such forecasts to make investments.
“I would say that I’ve been in business, running Berkshire for 58 years, and I’ve never opined an economic forecast of any use to the company. And all you have to do is keep running every business as well as we can, and we got to keep plenty of cash on hand so that people are going to keep making intelligent decisions, rather than those forced upon them.”
The above should convince you not to focus on forecasts, but instead, to use your time wisely to delve deeper into how the business is doing and whether it has great prospects.
History has shown that investors who park their money in strong, growing businesses will be well-rewarded over time by a steadily-rising share price.
5. Watch out for risks
When it comes to investing, Buffett is paranoid about losing money.
He has two simple rules.
Rule Number One: Don’t lose money
Rule Number Two: Don’t forget Rule Number One!
For your investments, you should keep an eye out for the risks involved rather than focus on just the potential rewards.
Like Buffett, you should also be focused on avoiding losses by doing the necessary due diligence and research before you commit your money.
If you took the above five lessons to heart, you should enjoy a positive investment result.
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Disclosure: Royston Yang owns shares of Apple.
