Warren Buffett says that the best investment I can make is in myself. Accordingly, I’m looking for investing lessons from 2022 I can take forward into next year.
When I think about the year gone by, two things stand out to me. These are principles I’ve believed in for some time, but the last year has reminded me of their importance.
Keeping these in mind is vital for navigating a volatile stock market. I’m expecting more turbulence in 2023, so keeping these at the front of my mind will be important.
Investing in businesses
First and foremost, I’m reminded that buying stocks is about making an investment in a company. As such, how the investment is doing is determined by how the underlying business does, not what happens to the share price.
The stock market, as Buffett notes, is there to serve investors like me, not to inform us. The fact that a stock like Rightmove is cheaper today than it was a year ago doesn’t mean the business is in worse shape than it was last December.
In the annual letter to Berkshire Hathaway shareholders, Buffett stated that he and Charlie Munger are business-pickers, rather than stock-pickers. I think this is one of the most important points about investing in general and will be central to 2023.
This is especially true for someone like me. I don’t intend to sell my stocks in the year ahead, so I should be paying attention to how the business is performing, not the price at which someone might be willing to buy my shares from me.
Avoid overpaying
Falling share prices have been a prominent theme of 2022. And this reminds me of the importance of not paying too much for stocks.
If I buy shares in a company at a good price and the stock market goes down, that’s fine. As long as I’m patient, I can always keep my investment and wait for the price to reach its proper level.
On the other hand, if I overpay for a stock and it falls, then I have no reason to think it should ever reach its previous price. It was too expensive then, so why should anyone pay that for it now?
The most obvious example of this, to my mind is Zoom Video Communications. The stock is down 60% since the start of the year, despite a 26% increase in the company’s operating income.
The reason for this is straightforward — at a price-to-earnings (P/E) ratio of 73, the Zoom share price was much too high at the beginning of 2022. As a result, the stock has fallen sharply during the downturn in the stock market.
Buffett says it’s only when the tide goes out that we find out who has been swimming naked. This reminds me of the importance of not overpaying for investments to avoid being caught out as interest rates go up.
Investing principles
These are the principles that have driven Warren Buffett’s success in the past. And I think they can bring me success with my own investments.
In many ways, being able to focus on what matters is the most important part of investing. And if I can block out the noise and concentrate on Buffett’s advice, I think I can do well.
