Known as the Oracle of Omaha, Warren Buffett is considered by many the greatest investor of all time. His business acumen and investing IQ are through the roof. Even at 85 years of age, his mind is still sharp and he has the energy of a much younger man. Over the years, he has given us many great nuggets of wisdom. I will go over some of that wisdom here.
"Two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. ... We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
If you watch the markets, you’ll notice that people have a herd mentality when it comes to buying and selling. When markets are reaching record numbers, people tend to buy more and more. Analysts give “buy” ratings on more stocks. Your taxi driver and hair stylist are telling you to buy more shares. On the other hand, when markets tumble during recessionary periods, everyone is fearful and selling. Analysts are giving out “sell” or “hold” ratings on most companies. People are telling you to stay out of the markets and sell what you have since you’ll lose your money. It’s dangerous and stupid to be investing, instead, put your money in a bank account.
Our friend Warren is telling us the opposite. He tells us to be fearful when others are greedy and greedy when others are fearful. When people are greedy, that is when the markets are hitting record highs. Greedy people want to buy more with the expectation that the stock prices will keep going higher. Well, Mr. Buffett is telling us to be careful when that happens. When markets are hitting record highs, stocks are most likely overvalued. The high stock prices aren’t justified by the earnings of the companies. It is similar to paying $100 for a $50 dollar sweater just because everyone else is buying it. This is exactly when you need to be careful with your money.
On the other hand, Mr. Buffett is telling us to be greedy when others are fearful. When the market has tanked significantly, people don’t want to buy since they don’t think the markets will go back up. They think that investing in the markets is a hopeless endeavor. However, Mr. Buffett is telling us that this is the BEST time to buy. This is when stocks are cheap since people have given up on them. This is when that $50 sweater can be bought for $25 since no one wants it. However, it is still the same sweater that it was when it was $75.
Be grateful when the markets are down, use it as an opportunity to become wealthy.
"No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant."
Mr. Buffett’s key message here is to be patient and invest for the long run. Your investments take time to ride out all the short-term fluctuations. If you only hold onto solid investments for one year, you may lose money since anything can happen in such a short amount of time. However, if you hold onto a solid investment for five years, you have a mucher higher chance of generating a positive return.
"Do not save what is left after spending, but spend what is left after saving."
Here, Mr. Buffett is giving us a very simple yet powerful message. It is a message that most of us need to hear. We need to prioritize saving over spending. One way to do this is to automatically defer a portion of our paycheck to our investment accounts. Only after we have done that, we can consider using the remaining portion for our expenses. This “save first” mentality will change the way we handle money and empower us to move towards financial independence.
Not sure where to get started on stock investing? Check out my top resources here.
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