One challenge faced by all investors sooner or later is learning to separate reality from myth, signal from noise. For me, consulting the thoughts and strategies of market masters such as Warren Buffett can be helpful in this regard. Here’s a small selection of how the Sage of Omaha’s incredible success shows why we all need to frequently question the things we hear.
“The more stocks I own, the better”
Spreading my money around different shares sounds like plain common sense. After all, investing in just a few stocks, however carefully picked, opens me up to the threat of massive volatility and, perhaps, huge losses.
The truth, however, is a little more nuanced. Having too many investments is potentially as problematic as having too few. Why? The gains made by my winning picks will be diluted by the poorer performers and thus have less impact on my overall returns. Owning nothing but growth stocks when value stocks are in vogue is similarly not ideal.
Warren Buffett has long recognised the power that comes from running a concentrated portfolio of high-quality companies in different sectors. Investing heavily in one incredibly profitable beverage business (Coca-Cola), for example, has served him far better than investing in a number of average beverage businesses.
Clearly, the appropriate number of stocks for a person to hold will depend on many factors. There is no right number. However, the idea that ‘more is better’ should not be blindly accepted.
“Only invest if you’re already rich”
The fact that Warren Buffett is one of the wealthiest individuals on the planet may be taken as a sign to non-investors that only the rich should get involved in the stock market. In fact, Buffett started from scratch, making his first investment at the age of 11.
Now, I sincerely doubt there are many 11-year-olds out there doing the same. Nonetheless, grasping the importance of getting started and cutting costs where possible are key to growing wealth. This applies regardless of a person’s age. It’s about making use of tax-efficient accounts, zero/low-commission online brokers and, if so inclined, cheap index-tracking funds.
One caveat to mention is that investing usually only makes sense when there’s a lack of debt (mortgage excluded). Having an emergency cash fund for life’s eventualities is also important.
“You can time the market”
It’s easy to study a share price graph and pick out what would have been the optimum moment to buy. For example, we now know that March 2020 was a wonderful time to go shopping in the market.
The problem is that all of this is exceptionally easy to say in hindsight. When the chips are down and prices are tumbling, it takes guts to throw money into assets such as equities. To make matters worse, anyone attempting to ‘buy at the bottom’ perfectly soon faces another challenge: identifying exactly when to sell.
As successful as he is, Warren Buffett doesn’t know what will happen next any more than I do. Instead, he recognises that a strategy of being “greedy when others are fearful” tends to work out well. This is assuming that the investor possesses sufficient patience to allow things to actually work out.
Holding the same stock for decades sounds unexciting, but it’s played a huge role in making Buffett the billionaire he now is.
