By: Chris Rowe — October 20, 2008
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That's just one of the many famous investing principles quoted from the legendary investor Warren Buffett, a man who hops back and forth between #1 and #2 on the Forbes 400 list.
You might have read the October 16, 2008 article that he wrote, published by the New York Times where he said, not only that he's been a buyer of American stocks, but that "if prices keep looking this attractive" his "non-Berkshire Hathaway net worth will soon be 100 percent in United States equities."
WOW! What a huge statement from such a huge investor!
Most individual investors who have been scared out of their wits in the last 12 months, especially since September, are asking how they should play the market when an article like that is written by a man who's considered to be the most successful investor in history. On one hand, every expert, including Buffett seems to agree that the economy will likely get worse before it gets better. On the other hand, when markets have been at their lowest points, historically, have been when economic sentiment has been at it's absolute gloomiest!
So today I'll talk about how to make sense of these mixed signals and more importantly, how to profit from them.
First, you should understand that most investors who go into the market thinking they have a long-term outlook really don't have a long-term outlook. Most buy stocks, "for the long-term", but if they go up, they sell them too quickly to "lock-in a profit" and when stocks go down, they hold on to them thinking they will come back. Those stocks typically don't get sold until they are down so far that it's sickening to look at them any longer. That's why most individual investors buy near the high and sell near the bottom.
Warren Buffett tends to do the opposite. Why?
Why can't you invest like Warren Buffett?
First of all, Mr. Buffett starts by analyzing a company to find what he believes to be the company's intrinsic value, and he then buys the company at a significant discount to that value. This gives him enough confidence that he doesn't care how much the stock fluctuates in the interim, as long as he knows he bought the stock for much less than it's worth.
Joe Public doesn't typically have that kind of confidence so he is liable to get shaken out of a stock at the first sign of danger, or when the stock declines by a large dollar amount. The reason Joe Public isn't confident enough to hold the stock is Mr. Public doesn't know how to analyze stocks like Mr. Buffett. So what does Joe Public do? He diversifies... for safety.
But here's another Buffett quote: "Diversification is just a hedge for ignorance".
Diversification is an important part of prudent investing. But people diversify because they don't feel confident enough that they made good investments in the first place. But over-diversification is a bad trap to fall into, because if you are too diversified, you will match the performance of the stock market, at best, or more likely, you will underperform. If you want to be assured that you'll match the market, you should buy SPDR S&P 500 ETF (SPY) to match the S&P 500, or Dow Diamonds ETF (DIA) to match the Dow Jones Industrial Average, or PowerShares QQQ (QQQQ) to match the NASDAQ 100.
If you want to invest like Buffett, and consistently outperform the general market, it's actually very simple. Buy shares of his holding company Berkshire Hathaway. If $130,000.00/share is too much to shell out to buy one "A-share" of Berkshire Hathaway (BRK.A), then you can buy the "B-Shares" (BRK.B) for about $4,100.00/share. Whatever you do, don't make the mistake of dismissing Berkshire Hathaway as an investment because you think you are better off buying cheaper stock that you can afford a larger number of shares of.
From March 2000 to March 2003 while the S&P 500 was down 40% and the NASDAQ down about 73%, Berkshire Hathaway B-shares were up 43%.
Since January 1998 the S&P 500 and the NASDAQ composite are just about flat while BRK.B is up over 150%.
Buying and holding Berkshire Hathaway is probably the best chance any individual investor has of matching what Warren Buffet can do on long-term holdings.
I personally just bought shares of Berkshire Hathaway just last week. While it's a good long-term investment (and I know Mr. Buffett will probably call me up and chew me out for this), you can also trade the stock. Just over the last couple of weeks the stock made a 19% gain!
But if you have the ability to take control of your 401K as I do (my plan allows me to transfer a percentage of my funds to an online broker), you might consider riding the coat tails of the smartest investor on earth - Chris Rowe. Or you might even decide to buy Berkshire Hathaway in your account, instead of letting mutual funds (85% of which or more don't even beat the general market) eat into your already underperforming returns with the fees they charge.
Frankly, I am outperforming Mr. Buffett's Berkshire this year, personally, at my trading service, The Trend Rider because I am typically set up to profit from both upside moves as well as downside moves. The difference is when you trade, you have to pay taxes. When you buy and hold something for many years (BRK.A or BRK.B comes to mind) you either don't pay taxes (because you haven't sold it) or you pay long-term taxes which tend to be significantly less than short-term taxes.
I choose to do both.
My point here is that there is more than one way to feel as confident as Warren Buffett does through this market turmoil. Mr. Buffett won't be shaken out of the market at the wrong time because he is 100% confident in his analysis, and that he purchased a stock for much less than it's really worth. That's why he isn't like your typical individual investor who let's market volatility dictate his moves.
What if you don't think you have the same investing skills as Warren Buffett? What if you don't want to own only Berkshire?
My secret is easy. I feel confident enough in my trading because I play both the bull and the bear side of the market. Hedging allows me to sleep well at night.
So feel free to check me or Warren out for guidance.
See ya next week!