Here’s why I use the Warren Buffett approach to try to beat the stock market

I reckon the Warren Buffett approach to stock market investing might be more important than ever, in these times of fear and uncertainty.

| More on:
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.

I’ve been sitting back and reading Warren Buffett‘s 2023 letter to shareholders.

This one seems, perhaps, even more thoughtful than most recent ones. Maybe it’s to do with the passing of Charlie Munger, who died in November.

Whatever it is, this letter does a great job of summing up Buffett’s wisdom. And one thing seems especially apt today.

Beat the market?

There’s been an idea for years that, if all company data is available for all to see at the same time, it should be impossible to beat the market consistently.

It’s called the efficient… something or other. I try not to take too much notice of big words from ivory tower academics.

Warren Buffett himself seems to be the one who tests, and disproves, that nonsense. He’s been soundly beating the market since he took control of Berkshire Hathaway in 1965. And he was armed with the same information everyone else had.

But doesn’t the vastly quicker, minute-by-minute, stream of data that bombards us today make it harder and harder to beat the market?

The rational investor

I think it’s exactly the opposite. I’d say today’s shorter attention spans are making people less rational, if anything.

What evidence do I have? I offer:

Occasionally, markets and/or the economy will cause stocks and bonds of some large and fundamentally good businesses to be strikingly mispriced. […] If you believe that American investors are now more stable than in the past, think back to September 2008. Speed of communication and the wonders of technology facilitate instant worldwide paralysis.

Warren Buffett, letter to shareholders, 2023

As far as I can see, the past decade has been littered with vastly mispriced stocks.

Strikingly mispriced

Now, I don’t want to bang on about Lloyds Banking Group (LSE: LLOY) again. Oh, hang on, yes I do. I love banging on about Lloyds.

Do I think Lloyds shares are mispriced? I sure do.

I mean, forecasts put the price-to-earnings (P/E) ratio at nine, dropping to only around six by 2026. And we’re looking at a 5.4% dividend yield, which could rise to 7% by 2026.

Oh, there’s a big share buyback going on too. And, as the UK’s biggest mortgage lender, it’s surely in a long-term winning market, isn’t it?

We don’t all agree

The thing is, a lot of big investors clearly don’t agree with me. And there is risk with Lloyds, for sure.

The mortgage business that I see as a long-term cash cow could look like a short-term liability to another investor. And they’d be right too.

How we decide is based, in part, on how far we look ahead.

Today, I’m more convinced than ever that more and more people are looking at share prices with short-term eyes. Get into, or out of, the latest craze. And then on to next week’s hot thing.

Private investors

So no, the days of private investors being able to beat the market are not over. And I don’t think they ever will be. Too many people always want to get ahead quickly, and they make the mistakes that leave the door open for long-term investors.

With some hard work, and a bit of luck, we should have a better chance thanks to the lessons we learn from Warren Buffett.

And Charlie Munger. Buffett owes a lot to Charlie. I think we all do.

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.

Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group 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

Young Black man sat in front of laptop while wearing headphones
Investing Articles

Investing just £10 a day in UK stocks could bag me a passive income stream of £267 a week!

This Fool explains how investing in UK stocks rather than buying a couple of takeaway coffees a day could help…

Read more »

Investing Articles

A cheap stock to consider buying as the FTSE 100 hits all-time highs

Roland Head explains why the FTSE 100 probably isn’t expensive and highlights a cheap dividend share to consider buying today.

Read more »

Investing Articles

If I were retiring tomorrow, I’d snap up these 3 passive income stocks!

Our writer was recently asked which passive income stocks she’d be happy to buy if she were to retire tomorrow.…

Read more »

Investing Articles

As the FTSE 100 hits an all-time high, are the days of cheap shares coming to an end?

The signs suggest that confidence and optimism are finally getting the FTSE 100 back on track, as the index hits…

Read more »

Investing Articles

Which FTSE 100 stocks could benefit after the UK’s premier index reaches all-time highs?

As the FTSE 100 hit all-time highs yesterday, our writer details which stocks could be primed to climb upwards.

Read more »

Investing Articles

Down massively in 2024 so far, is there worse to come for Tesla stock?

Tesla stock has been been stuck in reverse gear. Will the latest earnings announcement see the share price continue to…

Read more »

Young Caucasian woman with pink her studying from her laptop screen
Dividend Shares

These 2 dividend stocks are getting way too cheap

Jon Smith looks at different financial metrics to prove that some dividend stocks are undervalued at the moment and could…

Read more »

Investing Articles

Is the JD Sports share price set to explode?

Christopher Ruane considers why the JD Sports share price has done little over the past five years, even though sales…

Read more »