A key Warren Buffett lesson for 2022

There’s one Warren Buffett mindset our writer will apply to investing in 2022. Here he explains why he thinks it can help him.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The past several years have been volatile in the stock market. No one knows what will happen in the coming 12 months. But I think the investing wisdom of Warren Buffett will continue to be helpful to me as an investor.

There is one Warren Buffett investing mindset I will certainly be bearing in mind in 2022.

Fear and greed

On different occasions throughout his long career, Buffett has used the same phrase. He has suggested that as an investor, he aspires to be “fearful when others are greedy and greedy when others are fearful”.

That sounds a bit like what is sometimes called contrarian investing. That involves doing the opposite of what a lot of people are doing. But Buffett’s approach here is more nuanced than simply being a contrarian.

It involves looking at the emotional drivers of other market participants, not just their actions. Warren Buffett is focussed here on very specific emotions. I think his logic could help me in 2022. If I feel other market participants are too greedy, it could be time for me to consider whether I want to keep investing in the market or wait for a possible correction. Similarly, if investors are fearful — like we saw in March 2020 — it could present me with a buying opportunity for my portfolio.

Spotting the mood

But how can I tell whether others are being fearful or greedy?

Last year, briefly, there was a clear sense of fear. Markets plunged, many companies stopped paying dividends, the financial outlook was unclear, and businesses warned about bad times ahead. Since then, I don’t think we’ve seen the same level of fear resurface.

I do think there have been growing signs of greed in 2021, though. Share flotations which soon flop, like THG and Deliveroo, can be a sign that the flotation underwriters and business owners have been greedy in setting a price that is too high. The rise of meme stocks also suggests that some stock market participants have been propelled by short-term greed rather than the considered analysis I associate with long-term investors.

On the other hand, there continue to be signs of fear in some corners of the market at least. Consider aviation as an example. Shares in both easyjet and British Airways owner IAG have suffered in recent months as concerns have resurfaced about future demand for air travel.

Overall, though, I think that as 2021 draws to a close, there is a considerable amount of greed in the market.

Applying the Warren Buffett approach

That is why, in 2022, I will be looking out for more signs of greed. If they arrive I will be more fearful. So in practical terms, I will be more wary of possible valuations. I will focus on evaluating companies rationally, without getting swept up in market euphoria, though I think, in any case, that is the right approach to take at all times.

Then, if the mood suddenly switches back to fear, I will be greedy in scooping up battered down shares for my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Deliveroo Holdings Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »