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Timely Lessons from Warren Buffet

Written by Kris Wrenn

Having quoted the great Warren Buffet so many times over the years, I thought it very deserving that I write an entire Hudson article about him. This is especially timely given recent volatility and the potential for a lot more. Both the Dow Jones and the All Ords are down between 7% and 8% over 12 months. The Dow is even down over the 2-year mark, with the All Ords pretty much breaking even. Inflation remains stubbornly high, with the Fed in the US maintaining that they will not stop increasing rates until it looks as though it will fall back to their target of 2%.

Warren Buffet in a nutshell

Warren Buffet is currently aged 92 and is widely considered to be one of the most successful investors of recent times having amassed a personal fortune of over $100 billion. He is the CEO of one of the world’s largest companies, Berkshire Hathaway. How good is he? Well, since 1965 Berkshire Hathaway has averaged an annual return of just over 20% per annum, where the market (based on the S&P500) has averaged 10.5% p/a. It’s not quite double, but it’s close enough, and more importantly that is over a 57 year period.

So at its core, what does Warren Buffet preach and why? Firstly I should say that with respect to this article, a lot of what I will say relates to those that are “net buyers” of stocks, not “net sellers”, i.e. those that are seeking to accumulate shares, not those that may have a very large parcel already and are looking to sell them to provide an income. Assuming you are an accumulator, then one of the overarching philosophies that Warren Buffet maintains is this:

Lesson 1 – a falling market is a good thing.

As a share buyer, think of them as the same as anything else you might buy … from apples at the supermarket to a TV, to a house. By that logic falling share prices are almost akin to falling inflation. If share prices really fall … think 30% or even 40%, then that is akin to a Black Friday sale at your local shopping centre. And yet, when black Friday hits, everyone rushes to the shops, but when the share market tanks most people run for the hills and actually sell their shares, not hold on to them. Why do we know most people are wanting to sell, not buy during these times … because that’s why share prices fall. It is demand and supply and it is the tendency to want to get rid of them that makes them fall. But when someone sells (at this lower price than they were worth), someone else is buying (at a discount).

If the above paragraph is logical to you, then it actually leads us to an almost bizarre realisation, whereby it seems logical that … we actually WANT the share market to go down! The sad reality with the share market is that assuming there is some level of volatility (and there always is), then there will always be winners and losers. And if you want to be a winner, you need to buy that devalued stock from someone else choosing to part ways with it.

Why do people want to sell something “cheaply”?

Warren Buffet will (quite rightly) tell you that it comes down to emotions, with the main emotions fuelling sales being fear and panic. If you’re selling a car worth (roughly) $20,000 and someone comes along and offers you $10,000, any rational person will give a resounding NO and not think about it again. With the share market though the price at any given time is out of your hands. Furthermore, while the stock market remains open that price changes every minute. Imagine someone was whispering in your ear that the car was worth $19,000, and then that it was worth $18,000, and so on.

Lesson 2 – do not give in to fear or panic selling

What you need to do of course is the complete opposite and to take advantage, but it takes a certain character to do that.

“It doesn’t take a high IQ to figure out that (stocks) are cheap, but it does take a temperament that’s willing to step up and actually act” Warren Buffet.

Once you’ve bought in, SET and FORGET, and don’t check the share market every day. Again, consider shares like any other product that you purchase … No one in their right mind goes and gets their house valued every month to make sure it’s not falling in value. People often have a tendency to buy shares believing they are buying a good stock at a good price, but then check that price a week later and a month later. Don’t allow yourself to give into that, and ask yourself … why would you sell if it’s up, and why would sell if it’s down?

I’m not sure that any one person is credited with this quote, but we have all heard the most famous of investment sayings; it is not about “timing” the market but about “time in” the market.

Inflation

I mentioned before the current stubborn inflationary pressures. So what should we do during times of rising inflation? Like much of above Warren Buffet’s take on this will seem rudimentary but is still worth taking note:

“The best investment against inflation is to improve your own earning power”.

This might involve you making yourself more desirable to an employer and more likely to warrant the wage increase to combat the inflation. This won’t be possible for everyone however and, after making that quote, Buffet did go on to say that you can also have a more passive hedge against inflation, and that is, investing into businesses that can increase prices easily without increasing costs. This might be social media or TV networks  (Facebook, Channel 9) that can increase the number of adverts they show.

Interest Rates

Interest rates are undoubtedly going to continue to have an enormous economic impact throughout 2023 both in Australia and abroad, especially with so many property owners coming out of fixed loans.

“Interest rates are to the value of assets what gravity is to matter”. Warren Buffet.

i.e. They are a drag and like gravity there is nothing we can do about it. If governments continue to increase rates, then consumers will spend less (especially those with mortgages), on the whole, company profits will fall, which translates to falling share values.

If you are an accumulator and a net buyer of shares, and if this eventuates, then there really is only one question you need to ask yourself, and I will phrase it within the most famous of all Warren Buffet quotes ..

Will you … “be fearful when others are greedy, and greedy when others are fearful”?

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