Once a year legendary investor Warren Buffett auctions off a lunch date for charity. Last year’s winner ponied up $3.3 million to break bread with Buffett.
Can’t imagine squeezing that out of your budget? No worries. You can soak up Buffett’s investing wisdom for free.
For decades, he has generously shared his investment insights in interviews and Berkshire Hathaway’s annual shareholder letter. (Check out CNBC.com for coverage from this year’s letter, which the company released over the weekend.)
A Buffett bonus: His advice is blissfully free of financial jargon and is remarkable for its simplicity. His recipe for long-term success is centered on knowing how to keep your head when market volatility hits. The Buffett rules boil down to this: Stay calm and be smart when others are freaking out.
The words of Warren—and a few other legendary financial minds—that follow are a master class in everything you need to know to navigate bad markets and reach your long-term goals.
Lesson 1: Market timing is a fool’s move
"The stock market is a device for transferring money from the impatient to the patient."
When stock prices are falling, it’s human nature to get stressed out. Buffett’s message is to stay glued to your long-term investing strategy and not make an emotional decision to sell when stocks are taking a hit.
That was also the message of Jack Bogle, the founder of Vanguard, who recently died at age 89. Buffett was a huge fan. In Berkshire Hathaway’s 2016 shareholder letter, Buffett wrote: “If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice would be Jack Bogle.” That’s not hyperbole. Bogle introduced the first index fund for individual investors and is the driving force behind low fees for mutual funds and ETFs.
Like Buffett’s, Bogle’s clarion message was patience: “Time is your friend; impulse is your enemy.” Whenever markets were down and anxiety up, Bogle’s advice was “Don’t just do something, stand there.”
Allan Roth, a financial advisor in Colorado Springs, Colorado, says a common through line for Buffett and Bogle is “that being successful is almost boring.”
“Once you have a long-term plan, stick with it,” says Roth, whose company motto is “dare to be dull.”
Lesson 2: Falling stock prices are a long-term investor’s best friend
“We are a more aggressive buyer when they (stocks) are going down. I feel much better when they are going down.”
In Berkshire Hathaway’s 1997 shareholder letter Buffett explained the upside of falling prices in more detail:
“If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the ‘hamburgers’ they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
Lesson 3: Be a contrarian
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”
Buffett has often riffed on his version of buy low and sell high. But the timing of this quote is especially telling. It is from a New York Times op-ed that ran in mid-October 2008. That was deep into the financial crisis. Stocks were already down 40 percent from their high a year earlier. Talk about an emotional gut punch.
Yet Buffett wanted everyone to know that he was buying.
He explained that he had no idea what stocks would do over the short term, but he was betting that the markets’ history of rebounding and reaching new highs over the long term would play out. At a time when selling stocks and owning cash would bring immediate (short-term) emotional relief, he was preaching by example to do just the opposite. “Equities will almost certainly outperform cash over the next decade, probably by a substantial degree,” he wrote in his opinion piece.
A $1,000 investment in an index of U.S. stocks in mid-October 2008 is now worth more than $3,800. If that $1,000 was parked in cash back then and never made it into stocks it would be worth $1,045 today.
That said, being a contrarian doesn’t come naturally for many of us. It can be emotionally hard to keep investing in a volatile market. Buffett’s investing mentor Benjamin Graham laid out the challenge in “The Intelligent Investor,” the book that launched Buffett some 70 years ago. “The investor’s chief problem—and even his worst enemy—is likely to be himself,” Graham wrote.
That’s where you’ve got a huge 21st-century edge. You can set up automatic recurring contributions from your checking account into your 401(k), IRA, 529 college savings plan or other investment account. (It’s a smart strategy called dollar-cost averaging.)
In 2015, Buffett framed investing as “an easy game if you can control your emotions.” Automation helps you get closer to easy.
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February 26, 2019