Do What Warren Buffett Says, Not What He Does, Otherwise You Will Go Bankrupt
This is where newbie investors go wrong
Warren Buffett was in his eighties, and particularly excited.
It was early 2011. A year earlier, he had spent $27 billion on a railroad. It was the Burlington Northern Santa Fe Railroad, the second-largest in the United States, and the most indebted.
US$10 billion in the red.
Besides the capital he was already investing, Buffett took another risk. He heard criticism from all corners that he would have paid too much for a dead business. But no.
In the first year under Buffett’s management, the railroad turned over $4 billion in profit. The largest in her history.
“Our highlight of 2010 was the Burlington acquisition. It’s doing better than I expected myself,” he said at his annual meeting with Berkshire Hathaway’s thousands of shareholders in a gymnasium.
And Berkshire was starting the year with $38 billion cash on hand to spend on new ventures. Buffett could joke at will: “Our elephant rifle is loaded,” he warned. “And my trigger finger is scratching…”
The financial market is a sport for Buffett
He collects the billions, rather than spending them. At least not squandering them as he might.
Even with $111.8 billion in his hand, he still lives in the same house he bought in 1958 in Omaha, Nebraska, a town of 479,000 people in the heart of the United States.
The property is worth US$650,000. Passers-by on the sidewalk can even see the billionaire walking to the kitchen through the window. And if he walks naked, he will be on the cover of the gossip magazines.
He is like those fishermen who go to the Pantanal, fish, but don’t eat: they kiss the fish and throw the frightened animal back into the water.
Warren Buffett claimed that he would not put money into technology companies (the dot com companies) simply because he did not know that market well enough.
Buffett may act as a money hunter, but few take such care in aiming.
His strategy with stocks has always been one of least risk. Only buy stocks that pay fat dividends, from companies well established in the market. Bitcoin is out of the question.
He is so averse to the idea of trying to profit from short-term rises that he advises other investors to “buy your shares as if the stock market is going to be closed for ten years.
And that the best term for keeping your money in the paper of a good company is “forever.”
When the bubble burst and he didn’t lose a penny, Buffett was hailed as a god. And he held firm to his opinion for the next few years.
In 2011, in an interview with Bloomberg:
“It’s easy for me to predict how Coca-Cola will be financially in five or ten years. But I don’t think it’s simple to come to a conclusion like that about Apple, for example.”
Buffett said, “I don’t know if technology companies have a future, but I do know that men will never stop shaving.
Today men don’t shave as much, and Coca-Cola has lost some of its space. But no, Buffett has not been left behind.
Over the last few years, he has sold all of his Procter shares, well decreased his stake in Coca-Cola, and, most importantly, changed his mind about Apple.
By 2019, Warren Buffett was the third-largest shareholder in Apple, holding 5% of the stock. That’s more than it sounds. After all, that stake is worth more than $40 billion.
In 2018, when Apple became the first company to surpass $1 trillion in market value, Buffett was already in. His idea of “what Apple will look like in five or ten years” has certainly changed. So much so that today he says that if he could, he would buy 100% of the company’s stock.
Between the end of 2018 and the beginning of 2019, Apple’s stock plummeted. iPhone sales had stagnated, and the one making investors’ eyes shine was the Chinese competitor, Huawei.
The apple company’s stock took a spectacular 40% tumble. But Buffett didn’t lose any sleep. He had already said: “I really want Apple’s stock to fall, so I can buy more. With Coca-Cola, it was the same thing back then.
He started to increase his stake in the company at a time when nobody was paying much attention to the beverage company. The stock was at rock bottom. Pepsi was gaining more and more market share, and Coke had even changed its flavor to be more like its competitor. This was in 1986.
Buffett also went headlong into airlines. This was a surprise since Buffett despised it.
These companies have operated with small profit margins, and all it takes is one-off events, such as an unexpected rise in the price of oil, to start a series of bankruptcies in the sector.
Buffett changed his mind. He started 2020 as the owner of 8% of Southwest Airlines, the world’s first low-cost carrier, 7% of Delta, and with large stakes also in America and United. He bought a piece of all US commercial aviation. To justify his change of position, Warren said: “Airlines have had a bad first century. But the next one looks promising to me.
Then came the pandemic.
And Buffet understood again that the Wright Brothers should have gone into the bicycle business. He sold all his airline stock. At a loss.
He understood that the aviation market would either take a long time to grow again. Or that it would never be what it was since the forced home office has proven that much of the business travel can be replaced by a zoom meeting.
He would rather take a huge loss than hope for a miracle. Buffet doesn’t cheer. If the prospects are not clear in his accounts, forget it.
Another thing that is Warren’s style: keeping a particularly concentrated portfolio, at least for an investor of his size.
Buffet himself has said: “For 99% of investors the right thing is to diversify as much as possible. The other 1%, according to his reasoning, would be formed by those who have the time, technical knowledge, and talent to try to predict whether such and such company or such and such sector of the economy will remain healthy ten, twenty, or a hundred years from now. That is, do as I say, not as I do.
The problem is the old enemy of investors: the brain.
Our instincts are skewed toward something as unpredictable and frightening as the market. Sometimes it is hard to see the obvious. If you buy a stock, do you want it to start going up or down?
Buffet hopes it goes down. “I’d only hope they’d go up when I wanted to sell.”
And don’t forget: for Buffet there is no such thing as “the time to sell.”
If he is satisfied with the company’s prospects, he will die in its embrace. There’s just one problem: these tactics may not work for you.
Don’t do what Warren Buffett does for heaven’s sake
Our world is a more complicated place than Buffett’s.
Here there are times when you will have to spend more money than you make in years on one thing.
When it’s time to make a down payment on an apartment when it’s time to buy a car with cash to avoid the interest on the mortgage when it’s time to retire.
And for this the financial market is treacherous.
If you ask the bank manager what is the ideal time to leave your money in stocks, he might answer: “About three years”. And it will be a useless answer.
The stock market is only partly predictable.
They usually say “three years” because over long periods an investment in stocks tends to yield more than fixed income options. But the trend is one thing, reality is another.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.