Warren Buffett is regarded as one of the best investment managers in the world. He has been at the helm of the US-based financial services company Berkshire Hathaway for over half a century. His annualised returns average slightly over 20% per year, more than double the rate of return achieved by the FTSE 100. An investor who has invested £1,000 in Berkshire Hathaway 50 years ago would now have over £9m!
Many investors follow Buffett’s investment philosophy, not only because he is a great investor, but also because he offers valuable wisdom that the average investor can benefit from. Today I’d like to share with you several of his lessons I have learned over the years.
Value and price are two different concepts
Sometimes share prices of companies fall quite considerably and become a lot cheaper than then they were several months ago. However, just because the price is now less, does not mean the shares offer value.
For example, Thomas Cook Group’s share price has been tanking for over a year now. In May 2018, TCG shares were trading around 150p. In September 2018, they were down to 80p. And now the company has stopped trading.
In May 2019, when Citibank issued a damning warning and called the shares “worthless” many investors realised that the inevitable end would be approaching sooner rather than later. The rapid decline in the price of TCG shares and the final insolvency of the group is an important reminder that price does not equal value.
On the other hand, we can easily talk about several companies and industries in the FTSE 100 that have been suffering due to ongoing uncertainties caused by Brexit and the US-China trade dispute.
While investor confidence has been dented, many housebuilder stocks such as Berkeley Group Holdings, Persimmon and Taylor Wimpey have been on the decline. Yet most of these companies have solid businesses and robust financials.
Eventually, the Brexit discourse and the trade issues will somehow be behind us and most of these stocks will start to go up as investors will find value in their depressed share prices.
Value investors aim to pay a low price for a company relative to the value they receive. And to find a stock’s real value, one has to look beyond the price.
Fear and greed are two important emotions
“Be fearful when others are greedy, be greedy when others are fearful” would be Warren Buffett’s recommendation to most investors.
Greed is largely what powers bull markets. At the height of the dot-com bubble, I was working in New York City. I still vividly remember how taxi drivers were trading the hottest stocks online while we sat at red lights. And the number of people who would give advice on what shares to buy “now”… There was a real air of excitement 24/7. Was it bound to end in tears? In hindsight, yes, because it always does.
On the other hand, fear is mostly what drives bear markets. For example, as the 2008–09 recession progressed, the investing world looked gloomy. No one even wanted to hear the words ‘shares, stocks, indices’. Virtually every company saw its share price fall to new lows. However, the investors who put fear aside began to find value in these companies. And most shares and market indices recovered to reach new highs.
