It’s been a very odd few months in the stock market. We’ve seen the share prices of even huge well-known companies gyrate in what look like very unusual ways. So I’ve been learning from a billionaire investor who’s successfully ridden many market cycles: Warren Buffett.
Here are three lessons from Buffett I’ve been applying as I navigate the stock market in 2025.
1. Think of buying bits of businesses, not shares
A lot of people think about buying shares as essentially a numbers exercise. If a price has fallen by a large percentage, or looks like it is set to rise thanks to momentum, they may decide to invest.
Don’t get me wrong, I reckon valuing shares is important. But numbers alone can never tell the full story.
It’s important to know what you’re investing in. So Warren Buffett asks himself whether in an ideal world he’d feel comfortable owning a whole business like Apple or Coca-Cola. If not, he won’t buy its shares, no matter how interesting the price chart may look to a technical analyst (ie a numbers bod).
2. Hunt for the source of likely return
Something else Buffett asks when buying shares is how they’re likely to make money for him. Is a company undervalued relative to its asset base? Does it have some proprietary technology, brand or distribution network that can help it charge a premium price and likely keep doing so in future? Is the business so cash generative it can likely fund juicy dividends in years to come?
Buying a good business, even at an attractive price, might not always be enough. It’s important to ask: how do I think I’m going to get more from this investment over time (and allowing for the opportunity cost of tying up my money) than I’m paying today?
3. Navigate the tightrope between fear and greed
One of Buffett’s famous sayings is, “be fearful when others are greedy and be greedy when others are fearful”.
Looking around the UK stock market in recent weeks, I’ve seen loads of situations that brought those words to mind. For example, consider JD Sports (LSE: JD).
I already owned this share because I thought it was a great business going cheap. It has a lot of things Buffett looks for: a strong brand, large customer base and competitive moat, thanks to a lot of exclusive products. But the share price has fallen dramatically.
There are reasons for that. JD Sports has issued multiple profit warnings over the past year. A weak economy is a risk to demand for pricy footwear and indeed the chain expects like-for-like sales to fall this year.
However, the City seemed to go into a very fearful mindset regarding JD Sports, pushing the share close to 61p last month. It has since soared by over 46%.
Even now, I see JD Sports as potentially underpriced. The market capitalisation of £4.8bn is less than six times the company’s expected profit before tax and adjusting items for this year.
I’m glad I greedily topped up my position when others were very fearful! As the price has soared, I’ve sold a few shares to take some profit off the table, but kept most of my holding.
