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Buffetts best insights

Updated: Feb 26, 2021

Warren Buffett has had some amazingly simple yet amazingly insightful investing anecdotes to share over the years. I thought I would share some of my favorites.

Warren Buffett has been a source of great investment advice over the years. One of the most interesting things about this advice is that it's typically delivered in a fairly easy way to comprehend, that the average investor can relate to. I was just reflecting the other day on how some of the Buffett's own pearls of wisdom could've helped make me a better investor and could more optimally shape my investment decisions at various points in time.

In the short term the market is a popularity contest. In the long term it's a weighing machine.

I really love this bit of advice. It suggests that an investor should completely ignore short-term market movements and not bother checking into their trading accounts on a daily, weekly or even monthly basis.

Far too many times, investment decisions tend to get made spontaneously. If you see the share price of the stock has been consistently moving up, three or four days in a row, that often leads to a gut instinct to go out and chase the stock and buy it before it continues to go higher. Conversely buying a stock which has a declining share price over a short period of time sets in train a world of negative emotions that can result in unproductive decisions such as selling that same stock on the basis of random market movements.

Over the long-term though it's really the weight of earnings that determine a businesses success. This is an important factor in determining whether to continue a long-term partnership with the business. To the extent that earnings rise and continue to rise, investors should be predisposed to continue to retain an interest in that business. Too often we think that just because the stock has gone up 100% there's no reason that it will continue to go up another hundred percent more.

In fact nothing could be further from the truth. I prematurely sold a solid position in MasterCard in 2008 with no real appreciation for what the business could become even though it was still demonstrating a very solid track record of good earnings growth.

"Opportunities coming infrequently, when it rains gold put out the bucket not the thimble."

I really like this quote because it suggests that when you see good value ensure that you double down to take maximum advantage. This is something that I believe I should've done more of in 2009. Unfortunately market declines were so severe and scary that it was often hard to summon the courage to buy more than small amounts at a time.

I had a bit more luck applying this into 2018 when I picked up shares of Facebook when they were trading significantly down after worries of regulation on Russian election interference and Cambridge Analytica scandals. I knew the company was a quality holding which would eventually bounce back once market fears had abated. I didn't hold back and made the business a very large position. It since appreciated almost 2 X above that entry price.

Diversification is a protection against ignorance

This is an interesting statement which seems to fly in the face of conventional wisdom. Buffett argues that those who know what they're doing typically place no value on diversification. I think one has to take this statement with different levels of conviction based on how confident you are in your judgment. To many people, diversification certainly holds an important place in an investment portfolio to ensure that your bets aren't too concentrated in too few ideas in a limited number of sectors.

However what all investors can take from this statement is the importance of having conviction and doubling down on your best ideas which represent the best value. There's no point in investing in hundreds of stocks because you may as well just have an index fund to do that for you. Buffet's suggestion on this point is coming from the perspective of a concentrated investor who has a track record of successfully putting a majority of his capital into as few as five or six positions.

From my own personal experience I found that having too heavily concentrated a portfolio is an approach that doesn't necessarily work well for me. However I do see the practical sense in varying the amounts that you invest based on what your best ideas are and what positions have the greatest prospects for long-term return.

Don't be in a hurry to swing, wait for a fat pitch

It's sometimes hard to have the patience for a stock that you like to fall to a price that's attractive. There's too much of a tendency to want to buy immediately for fear of missing out. However the reality of markets and the reality of investor expectations is that over a long period of time stocks will always fall into a price that is within one's strike zone.

Whether it's macro concerns or mixed earnings, I'm yet to see an example of a stock that hasn't fallen into my strike price at one time or another. However I typically don't have the patience, nor the capital saved up to wait for these times. Buffett's advice here is a good reminder to not be in too much of a hurry to charge. It also illustrates the value in having capital saved up to take advantage of rainy days.

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