Warren Buffett’s returns prove that he is the greatest investor of all time. Can we invest like him and achieve similar results? If so, how can we invest like Warren Buffett?
Fortunately, Buffet’s own words provide plenty of clues from which we can derive his main investing principles.
One of Warren Buffet’s most well known quotes is:
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Sounds simple enough. We should then buy when others are selling or sell (or at least don’t buy) when everyone else is buying.
Some obvious examples from the past decade to guide our thinking:
- Would Buffett be buying tech stocks in 2000 when they were richly valued and in the news daily? Or would he wait until 2002 to buy them when many tech companies had failed and those that survived were selling for little more than the cash on their balance sheet?
- How about real estate, would Buffett be buying condos and new construction homes in 2006 with an abundance of flippers and sub prime buyers? Or would he wait to buy distressed properties from the banks in 2009?
- Finally, would he be buying oil stocks in 2008 when oil peaked near $150 per barrel? Or would he wait for oil prices to crash after the recession started?
Well, it turned out Buffett made a mistake – proving that no investor is perfect and that they don’t have to be perfect to amass high returns. Buffett did accumulate up to 84 million shares of ConocoPhillips (COP) by the third quarter of 2008 just at the peak of oil prices. He has since admitted his mistake and sold his position.
In conclusion, we can use Buffett’s simple rule to buy when others are fearful (selling) and sell when others are greedy (buying). Do the opposite of the popular thing. This principle applies to any asset class.
A good test might be to ask 10 people if they are buying an asset currently or considering doing so. If more than 5 say yes, then perhaps it might be worth looking elsewhere. On the other hand if only 1-2 of them say yes, then you might be on to finding an undervalued asset. As a corollary if 8 or more say yes, the potential for a price bubble is very high.
What asset class appears unpopular to you currently? Does any asset class seem too popular right now?
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