How We Can Practically Use Warren Buffet’s Advice
Warren Buffet, one of the most successful investors of all time, is known for his wise investment advice. One of his most famous quotes is "be fearful when others are greedy, and greedy when others are fearful." This quote encapsulates one of the key principles of Buffet's investment philosophy: that the market is often irrational, and that investors can make money by going against the crowd.
The stock market is driven by human emotions, and these emotions can often lead to irrational behavior. When the market is going up, investors become greedy and want to buy more stocks, even if they are overvalued. This can lead to a stock market bubble, where prices become inflated beyond their true value. Conversely, when the market is going down, investors become fearful and want to sell their stocks, even if they are undervalued. This can lead to a stock market crash, where prices become depressed below their true value.
Buffet's advice is to do the opposite of what the crowd is doing. When others are greedy and buying stocks at high prices, he advises investors to be fearful and avoid buying. On the other hand, when others are fearful and selling stocks at low prices, he advises investors to be greedy and buy. He suggests looking for stocks that have been unfairly punished by the market and have the potential to rebound in the future.
One of the reasons Buffet's advice is so powerful is that it is based on a long-term perspective. Buffet is not concerned with short-term market fluctuations, but rather with the underlying value of a company. He looks for companies that have a strong business model, a competitive advantage, and a history of consistent earnings. He believes that if a company is fundamentally sound, its stock price will eventually reflect its true value, regardless of what the market is doing in the short-term.
Buffet's advice is also supported by academic research. Studies have shown that value investing, which is the strategy of buying stocks that are undervalued and have the potential to grow in the future, has historically outperformed the market. In contrast, momentum investing, which is the strategy of buying stocks that have recently gone up in price, has historically underperformed the market.
It is important to note that following Buffet's advice is not easy. It requires discipline, patience, and a long-term perspective. It also requires a deep understanding of the companies and industries in which you are investing. Buffet himself has spent decades studying the companies he invests in, and he has a team of analysts that help him research potential investments.
However, we won’t be able to understand the markets as well as Warren Buffet does, and we can waste hundreds of hours researching company news, macroeconomic predictions, etc. and try to time the market. But I don’t believe that’s a good strategy for 99% of people. Instead we can use Buffet’s advice in 4 ways.
Don’t time the market. If 95% of the top paid Wall Street Fund Managers can’t predict the market over a 10 year period why would you think we could? These are people who work 70+ hr weeks, getting paid good money, spending billions of dollars on market data, with entire teams of people to beat the market. And studies show 19 out of 20 of them fail over a long enough time period. Instead when we think people are greedy we can focus on investing less in the market (but not lower than 10%). Instead put additional money towards an emergency fund, save for a down payment, a business venture, or even pay off debt. And when you feel the market is very fearful that’s when you can go more aggressive, investing an extra $100-200 a paycheck can quickly raise your savings rate and capitalize on historically lower prices.
Diversify. Just as we can’t time the market, we can’t predict which stocks will outperform the overall market. It’s a very hard skill to master, and only a few in history have done it successfully throughout their entire careers. Consider becoming a professional poker play. It’s possible to become very good at poker. You could study body language, poker theory, statistics and probabilities, and human psychology, and over time you would probably get pretty good. However the majority of people who go through a poker phase (myself included) lose money over their poker “careers”. Instead of trying to be the professional poker player, we want to own a piece of the casino. We achieve this by avoiding buying individual stocks, and instead buy low-cost diversified index funds. Funds that give you a piece of the total market (like an S&P 500 or even a World Diversified Index VEQT or VT). One share of these funds can have hundreds or even thousands of individual companies, and makes sure you have a small piece of all the winners. Historically the S&P 500 has averaged 11.82% per year (8.23% after inflation) since it’s inception in 1957.
Dollar-cost-average (DCA). Dollar-cost averaging is a strategy where investors invest a fixed amount of money in a particular stock or index at regular intervals. This strategy helps by removing the emotions out of the decision making process. It’s easy to get caught up in the lastest news bull/bear cycle and make biased decisions. It’s human nature. So to counteract this natural bias we want to create a plan that we can stick to over the long term in the worst market conditions. We do this by setting a fixed percent of your take-home income every paycheck. Start as low as 10% (even 5% if it’s really tight). Then no matter, keep buying more share every time you get paid, block out the noise and stay the path. This can be made easier using an automated system, so once it’s set up it automatically gets taken out of your account on a reoccuring basis. This will help us get an average price during both high and low prices. And because the market trends up over time (due to increased productivity, technology innovations, population growth, inflation, etc.) over time our index fund shares will eventually grow in value.
Don’t Sell/Don’t Go All in. When everyone around you is fearful, remember this is the time to hold. These are the moments where the big returns are made. If you don’t sell, and you keep buying, you will build wealth. When everyone around you is greedy, and 100% sure the price is going to “keep going up”, remember this is the time to be cautious. Don’t put 50%+ of your portfolio into the next hot stock, or a real estate property, or the newest crypto currency. These are the moments where the big losses are made. If you keep your “risky/fun” investments to less than 10% of your portfolio you will be able to keep the wealth you built for decades.
In conclusion, Warren Buffet's advice to be "fearful when others are greedy, and greedy when others are fearful" is a powerful reminder of investing. Remembering this quote can help us stay the path especially during the bear markets. If we can hold, and let our automated investing plan work over time, we can potentially reap the rewards of Buffet's wisdom and build long-term, generational wealth.
