During times of market uncertainty, it’s natural to look for guidance to calm your senses.
And there’s few better to dispense such advice than Warren Buffett.
Buffett is widely acknowledged as one of the most successful investors in the world, earning him the nickname “the Oracle of Omaha”.
The noise and volatility that has roiled the markets in the last 18 months would make most investors uncomfortable.
Here are seven useful tips you can rely on from the Oracle to help you to navigate the stock market.
1. Price is what you pay, value is what you get
Amid the noise, it’s important to remember that the value of a stock is different from the price that you paid for it.
Unfortunately, many investors tend to equate price with value.
To give an example, let’s say a company is worth $10 per share.
However, people are willing to pay just $8 to own the company as they may believe the remaining two dollars cannot be unlocked.
Hence, in this situation, it’s possible to pay a “discount” and obtain a company with assets of $10 per share for just $8.
Value investors understand this well and actively seek to buy bargains — paying much less for businesses than what they are worth.
2. Look for companies that can raise prices during periods of higher inflation
Inflation is a threat that erodes the value of your money over time.
If you let your money sit in a bank account, it will almost surely get eaten away by inflation, leaving you with less spending power in the future.
The key to beating inflation, therefore, is to find companies that can continually raise the prices of their products and services without harming their margins and profits.
These businesses usually have a strong market position and competitive advantage that allows them to do so.
And these are the types of stocks you should invest in and hold for the long term.
3. Never invest in a business you cannot understand
It may sound obvious, but you’d be surprised how many investors place their money in businesses they can’t explain in two lines.
The basic prerequisite to remember is to only invest your money in a business that you can understand easily.
If the business is too complex or uses too much business jargon, it would be wise to move on to something simpler.
4. It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price
Buffett’s quote here speaks to the quality of the underlying business.
Rather than searching for companies that are priced cheaply but are mediocre businesses, he suggests that you pay up for quality.
So, don’t hesitate to cough up a little bit more if you believe a business is outstanding.
5. Our favourite holding period is forever
Time is required for a business to grow and become more valuable.
Buffett believes that if you can’t hold a business for 10 years, then don’t bother owning it for even 10 minutes.
Great companies tend to get better over time, ageing gracefully just like fine wine.
And when a company reports ever-increasing profits and cash flows, their share prices and dividends should naturally also head up.
Naturally, you want to be a shareholder as share prices head up.
6. Remember that the stock market is a manic depressive
The stock market is more than cold, hard math defined by financial figures.
Share prices are also affected by basic human emotions such as greed and fear.
As a result, share prices are prone to extreme swings depending on whether investors as a whole are feeling optimistic or pessimistic.
This manic-depressive behaviour means that companies’ prices can bounce around wildly even though there has been little change in its underlying business.
Investors will do well to remember this fact so that they can take advantage of the market when it is depressed to scoop up bargains.
The market may act emotionally, but you shouldn’t.
7. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.
Investment portfolio managers usually feel compelled to act based on the latest news, even when doing nothing is typically a much wiser choice.
This bias towards action stems from the fact that they feel that they are being paid to “do something”.
As a retail investor, you should resist the urge to make changes to your portfolio that may be wholly unnecessary.
A sharp decline in the market isn’t always a reason for you to buy.
Conversely, when the market surges to a new all-time high, you should not feel motivated to sell, either.
The greatest “move” you can make is to just sit tight and continue to own great businesses.
It may sound utterly boring, but you can bet the rewards are anything but!
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.