As arguably the best investor that’s ever walked the planet, we should always keep in mind the words and wisdom of Warren Buffett. Here’s three quotes from the Sage of Omaha I think are particularly relevant for Foolish investors right now.
1. “It’s only when the tide turns out that you discover who’s been swimming naked”
Since the financial crisis, we’ve had years of historically low rates of interest. Only in recent times has there been any effort to raise them. And even then, the desire to do so hasn’t exactly been full-on.
Indeed, the US Federal Reserve announced in January it would be pressing the pause button on rate rises for the foreseeable future. That gives some indication of just how nervous many central bankers still are over the health of the global economy.
Many have benefited from these low rates, of course. Those with mortgages have seen their monthly payments remain stubbornly low. Cheap personal loans have also been available for those wanting to make a sizeable purchase, such as a new car.
Companies determined to grow at speed have also enjoyed this period, taking advantage of cheap debt. The problem is this has also allowed poorly managed, sub-standard businesses that would otherwise have collapsed to survive.
The one thing we can know for sure is that nothing lasts forever. A rising tide lifts all boats but only for so long. That’s why the vast majority of stocks I own have net cash on the balance sheet (or no debt at all) and proven business models. Are there any ‘zombies’ lurking in your portfolio?
2. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”
Following on from the first bit of wisdom, the second is worth remembering when that tide does eventually go out. Buffett preaches the obvious: buying when things are on sale rather than when they’re expensive — exactly what we tend to do when things we really want become available at bargain prices in the shops.
As many experienced investors know (and young investors will surely discover), doing the obvious sounds easy when markets and stocks are setting new highs. Buying when there’s ‘blood on the streets’ certainly is far more difficult but that’s exactly why it can work so well.
In preparation for such falls (and they will come), consider drawing up a list of stocks you’d buy as everyone else runs for the exits.
3. “Risk comes from not knowing what you’re doing”
So piling into stocks when their value plummets is easier said than done. But even if you are able to keep your head while everyone else is losing theirs, you need to remember your own tolerance for risk. In other words, don’t just buy anything.
A general market sell-off isn’t a signal to suddenly get interested in infinitely-more-risky small-cap oil and gas or biotech stocks over those in the FTSE 350 if you don’t already truly understand these sectors and possess the ability to separate the wheat from the chaff. Operating within your own circle of competence is essential, even when everything looks cheap.
Also bear in mind every investor’s risk tolerance changes with time and that economic downturns can persist for longer than many of us would like.
