by Warren Buffett Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has gotten a lot of attention of late, and for good reason. Despite Buffett’s long-term outperformance, Berkshire Hathaway had underperformed S&P 500 and the Nasdaq Composite in recent years due to Berkshire’s lack of tech stocks which have been responsible for most of the market gains.
But so far in 2022, Berkshire Hathaway shares are up 16% while the S&P 500 is down this year, largely thanks to the recent success of value stocks relative to growth stocks. Additionally, Berkshire Hathaway shares hit a new all-time high on Monday.
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Short-term results aside, here are three lessons from Warren Buffett that have proven invaluable over time and are especially true today.
1. Don’t follow the crowd
If there’s one thing we’ve learned in the last two years, it’s that following the crowd is a fantastic way to lose money.
Following the COVID-19-induced stock market sell-off in the spring of 2020, meme stocks, unprofitable growth stocks, and pandemic-related stocks took center stage. Companies like Zoom Video Communications and Interactive Platoon it produced monstrous gains, while energy, financials and real estate stocks were crushed. In 2021, the exact opposite happened, as many of these pandemic winners lost money while the energy sector was the best performing sector in the entire S&P 500.
Fast-forward to 2022, and several top large-cap growth stocks have seen significant drawdowns, while value stocks and stable dividend payers have been the real winners. The lesson here is that jumping in and out of what works or doesn’t work in a given period of time is a bad idea. For years, Warren Buffett and his team came under scrutiny for holding a large cash position and not buying more stock. But in the end, Buffett’s patience paid off, as Berkshire has had plenty of dry powder to take advantage of opportunities, such as as evidenced by its recent acquisition of aleghany.
2. Invest in what you know
Buffett is an advocate of investing in what you know to give yourself an edge in the stock market. It’s a fairly simple task, but it’s actually quite difficult to execute in practice.
Times are changing and the economy is becoming more digital than ever. Investors who don’t understand technology-centric companies could follow in Buffett’s footsteps and basically ignore the industry or invest in a relatively easy-to-understand business like Apple.
Yet another option is to learn about a business and listen to quarterly earnings calls. It takes more work, but it will also give you the tools you need to sustain a company through tough times and let the investment thesis play out. And if the investment thesis starts to change or the company loses its edge over the competition, you’ll be better positioned to get out of the position and avoid a knife drop.
3. Greed and fear
Typing it all together is Buffett’s famous quote of “being afraid when others are greedy and greedy when others are afraid.” The advice applies perfectly to buying the slump in the US-China trade war-induced sell-off in late 2018, the 2020 sell-off, and will probably apply well to the current sell-off in the that we are now. However, the advice to be afraid when others are greedy is also worth discussing.
Many growth companies saw their valuations pole vault to astronomical levels that were not based on fundamentals or the most optimistic forecasts. When that happens, Buffett’s advice is to be fearful, as it could be a sign of an unhealthy stock market.
Buffett has been a great believer in finding value where others are not looking. Of many ways, the oil and gas industry was filled with high yielding dividend stocks and value stocks that investors were ignoring in favor of renewable energy and more striking names. Carbon neutrality is the future. But the world still runs on fossil fuels. Buffett’s ability to take criticism and invest in “ugly” stocks allowed him to make brilliant purchases, such as the acquisition of some of domain energy‘s energy infrastructure assets in July 2020the gradual accumulation of Chevron valuesand other investments made through Berkshire Hathaway Energy, the energy arm of the conglomerate.
Keep calm when times are tough
When your screen is painted red and stocks keep falling with no end in sight, it’s easy to panic and make a decision you’ll later regret. By relying on timeless investment lessons, investors have some tools they can use when times are tough. Instead of downplaying the emotional side of investing, it’s often better to embrace the emotions associated with it and try to make the best decision you can with what you know.
One of the most comforting facts to turn to is the long-term performance of the US stock market. That history teaches us that each sell-off proved to be a great long-term buying opportunity.
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daniel foelberg you have the following options: $145 long calls in January 2024 on Zoom Video Communications, $45 long calls in January 2024 on Peloton Interactive, $150 short calls in January 2024 on Zoom Video Communications, and $50 short calls in January 2024 on Zoom Video Communications. 2024 at Peloton Interactive. The Motley Fool owns and recommends Apple, Berkshire Hathaway (B shares), Peloton Interactive, and Zoom Video Communications. The Motley Fool recommends Dominion Energy, Inc and recommends the following options: long January 2023 $200 call on Berkshire Hathaway (B shares), long March 2023 $120 call on Apple, short January 2023 $200 put on Berkshire Hathaway ( B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares) and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.