Financial Fitness: What can you learn from the Oracle of Omaha?

Warren Buffet, known as the “Oracle from Omaha,” is considered one of the most successful investors in history. Yet while the investment world may seem complex, Mr. Buffet’s advice is actually pretty simple.

Here are a few Buffet quotes, along with some suggestions on putting them to use: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” Essentially, this means you should look for good
investment vehicles whose price may have dropped. A bear market tends to drag down many stocks — even those with strong fundamentals and favourable prospects.

These stocks might then be considered “bargains.” While there are many factors that go into determining the value of a stock, one way to evaluate whether a stock is “expensive” or “cheap” is by looking at its price-to-earnings ratio (P/E).

For example, if Company A has a share price of $20 and earnings per share of $4, then it has a P/E, or price to earnings ratio, of 5. On the other hand, if Company B has the same share price of $20, but has earnings per share of $2, its P/E would be 10. So it would be considered more expensive than Company A. Be aware, though, that the P/E ratio works better as a measure of valuation when you are comparing two companies in the same industry.

“Time is the friend of the wonderful business, the enemy of the mediocre.” Be prepared to own quality stocks for the long term. A quality stock is one that has a high potential to provide predictable and sustainable growth in earnings over time. Over time, your discipline may be rewarded. On the other hand, if an investment is not of high quality, its flaws will be revealed over the years.

“If investors insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.” Trying to “time” the market — that is, attempting to buy when prices are low and sell when prices are high — is difficult. Too many people do just the opposite: They try to “cut their losses” by selling when the market is down and then go after the “hot” investment whose price may already be as high as it’s going to go.

Mr. Buffet clearly is not in favor of a market timing approach, and those who try to do it, he says, are probably better off by going against the crowd. Keep in mind, though, that even when holding investments rather than trying to time the market, investing in equities does involve risk, including potential loss of principal.

“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” When should you sell good investments? Never, according to Mr. Buffet. And while this endless holding period may not be possible for all of us, you get the idea: the longer you keep a good investment, the better off you may be when you do sell.

“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money.” The lesson here? Be an investor, not a speculator. A long run-up in the market can increase your wealth, but it may also make you prone to risky behavior if you think that all your investments will rise indefinitely.

As an investor, you may well want to consider Mr. Buffet’s ideas — they’ve worked well for him!

Deborah Leahy is an Investment Advisor with Edward Jones. Member CIPF

Be the first to comment on "Financial Fitness: What can you learn from the Oracle of Omaha?"

Leave a comment

Your email address will not be published.