Markets are choppy. In these confusing times, I’ve been drawing inspiration from the legendary investor Warren Buffett. His firm Berkshire Hathaway has the most expensive share price of any company in history. Each Class A share costs upwards of $300,000. He has generated massive wealth over the last few decades.
The Oracle of Omaha shares his wisdom with all, especially through his shareholder letters. So we too can learn the basics of his strategy, which is quite simple and can be followed by almost any investor. Today I’d like to share with you some of his investing principles.
Buying on fear
Broader markets are driven by two powerful emotions – fear and greed. They fuel sell-offs and run-ups, similar to what we’ve been seeing since March. And the recent health pandemic has also brought many economic challenges as well as worry for millions in the UK and billions worldwide.
Buffett firmly believes that stocks outperform all other asset classes over the long term, especially if interest rates and corporate tax rates remain low. Although Buffett is bullish on stocks long term, he has recently warned investors “that rosy prediction comes with a warning: anything can happen to stock prices tomorrow”.
And the idea of buying stocks during a period of economic uncertainty may sound risky, making investors fearful. After all, many share prices could once again move lower in the short run and even stay depressed for a long time. That could even mean paper losses in portfolios.
But Buffett and many seasoned investors well know that equity markets have historically delivered relatively high returns compared to most other asset classes.
Today may be a good time to put the fear factor aside. Every major dip in the stock market may offer a valuable buying opportunity.
Investing in an index
In early May, Berkshire Hathaway had its widely-followed annual shareholders meeting. There Warren Buffett said that the best thing to do for most people is to buy the broad stock market rather than picking individual shares. Over the years, he has given similar buy-and-hold advice regarding indexes.
When you are buy the broader market through investing in an index fund, it means you are bullish on the economy in the long run. I believe our economy is fundamentally strong. It has survived recessions, contractions as well as political uncertainty over the years. After a temporary crisis, it has always bounced back. As a result, indexes such as the FTSE 100 and the FTSE 250 continue to touch record highs.
Are you interested in following Buffett’s advice? Then you could invest in shares via a simple low-cost FTSE 100 tracker. It would offer you an easy way to invest in the largest 100 companies listed domestically.
You may also consider investing via Exchange Traded Funds (ETFs), which you can easily buy or sell as you would any other share. ETFs offer diversification over asset classes, industries, or global regions.
An example would be the iShares UK Dividend UCITS ETF — it comprises a basket of the 50 highest-yielding stocks from the FTSE 350 Index. Of if you’d also like global exposure, an ETF to consider could be the FTSE All-World ETF.
For investors who do not have the time and expertise to pick standalone stocks, passive investing may be a good bet.
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tezcang has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.