Tips To Succeed at Investing
by, Jeremy Reif, CRPS
As we step into the new year, seasoned investors are already contemplating their next moves in the stock market. It is easy to become antsy about your investment positions, but before you hit the buy button, consider heeding the timeless advice of Warren Buffett. We will uncover how Buffett chooses investments and why they might be the key to successful investing in 2024.
Buffett’s: Time-Tested Approach
Warren Buffett, in his 2013 letter to Berkshire Hathaway shareholders, laid out two tests that an investment should pass before purchasing it. This has been part of his investment strategy. Here’s a breakdown of the rationale and process:
- Sensible Earnings Estimation: The first step involves determining if you can “sensibly estimate an earnings range for five years out or more.”
- Reasonable Price Comparison: If the answer to the first step is yes, proceed to buy the stock only if its price is reasonable compared to the lower end of the estimated earnings range.
Investing Strategy, Reality
There are no shortcuts to investing. Yes, everyone has heard stories about someone that they know and that one stock that just happened to double overnight. Who is bold enough to put all their life’s savings into a risky investment with the only hope of watching it double? The answer is probably very few people. Buffett’s way of investing is not a get-rich-quick strategy. His strategy is about playing the long game.
The truth is that Warren Buffet and the late investment partner, Charlie Munger, have had a strategy from day one, and they have followed it for decades. Sometimes the strategy might falter in the short term, but it will continue to win more times than not. The hidden truth is that they were not greedy with investment returns and were okay with consistent production. The best part about their investing is that it is straightforward and includes a plan on how to invest.
Gimmicks and Schemes
Buffett and Munger’s strategies have lasted and outlasted many different schemes that have risen and fallen with the advancements of technology and the times. Buffett’s main principles might be part of these types of strategies: hedge funds, day traders, asset diversification, dynamic asset allocation, static allocation, and modern portfolio theory, but at the end of the day, they do not have the same proven and consistent track record or nearly as long.
Don’t fault other investment firms or advisors for trying to find something more efficient with larger returns, but why not follow the ideas of something that isn’t broken? These advisors or firms are only trying to fill a void that investors have asked for. The typical investor or pre-retiree usually didn’t save early, early enough, or enough, and now has a shorter amount of time to make up for their shortcomings. Playing the long-term horizon is usually not available for short-minded investors.
Sue Happy Society
A century ago, a mistake would have been the fault of the person who caused it. For most investors, it is the person who did not save enough in the first place. Nowadays, these investors try to take shortcuts. Many, at which point they ask for help via a stockbroker, money manager, et al.
Then, continue to ask the said advisor to be aggressive in hopes of hitting the jackpot, home run, or double their money. Which seldom ends well for either party. These investors hope to make up for lost time, for not saving enough, and for having poor returns, et al. Rather, they should continue to work, pay off debt, and save more.
Our society has changed, and suing for everything has become the new way because it is easier than admitting that they might have failed. It only takes one win because of dissatisfaction, poor timing, not enough time, too aggressive, or something circumstantial. A theory is born out of necessity and for protection from the ones who give advice and keep improper savers or investors who do not know what they are doing from investing too aggressively. Proper diversification through Modern Portfolio Theory (MPT).
Why That Theory Is Wrong
Buffett’s current investments and estate plan buck this modern trend of proper diversification. As one of the wealthiest men alive, there is a good reason why he does not follow MPT. MPT needs time to work, as does any investment strategy. MPT for many risk profiles below aggressive, dilutes the portfolio with investments such as bonds. Buffet’s portfolio has long been in favor of stocks over bonds.
Being that Buffett’s portfolio is usually all equities, how does he mitigate risk and diversify? Buffett mitigates the risk by following his two rules for choosing investments upfront. Research and time spent understanding potential investments also reduce risks. Risk is further reduced by setting up a five-year time horizon, as many investors do not set a time for how long they will own any particular investment or investment strategy.
Reading between the lines of the two rules and oversimplifying, Buffett tries to only invest in solid companies that have solid financials, which have an upward or growth trend or trajectory, and the hope to buy and hold them for a minimum of five years. The reality is that holding on for five years may not come true. The key is to hold them if they continue to meet the two main criteria; otherwise, do not be afraid to cut ties and find a replacement.
Invest wisely, stay informed, and remember, not every stock is a Buffett-approved stock. Investing success is about having a solid investment strategy and sticking to it for years to come.