OArren Buffett Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) has been getting a lot of attention lately, and for good reason. Despite Buffett’s long-term outperformance, Berkshire Hathaway had underperformed the S&P500 and the Nasdaq Compound in recent years due to Berkshire’s lack of tech stocks which were responsible for most of the market gains.
But so far in 2022, Berkshire Hathaway stock is up 16%, while the S&P 500 is down for the year, thanks in large part to the recent success in value stocks related to growth stocks. Additionally, Berkshire Hathaway stock hit a new all-time high on Monday.
Short-term results aside, here are three lessons from Warren Buffett that have proven invaluable over time and ring especially true today.
1. Don’t follow the crowd
If there’s one thing we’ve learned over the past two years, it’s that following the crowd is a fantastic way to lose money.
After the COVID-19-induced stock market sell-off in the spring of 2020, meme stocks, unprofitable growth stocks, and pandemic-related stocks took center stage. Companies like Focus on video communications and Interactive Platoon produced monster gains, while energy, financials and real estate stocks were crushed. In 2021, it was the exact opposite, as many of these pandemic winners lost money while the energy sector was the best performing sector in the entire S&P 500.
Fast forward to 2022, and several large-cap growth stocks saw significant declines while value stocks and stable dividend payers were the real winners. The lesson here is that jumping in and out of what works or doesn’t work in a given time frame is a bad idea. For years, Warren Buffett and his team have come under scrutiny for maintaining a large cash position and not buying more stocks. But in the end, Buffett’s patience paid off, as Berkshire had plenty of dry powder to seize opportunities, like evidenced by its recent acquisition of Alleghenia.
2. Invest in what you know
Buffett is a proponent of investing in what you know in order to have an advantage in the stock market. It’s a fairly simple task, but it’s actually quite difficult to execute in practice.
Times are changing and the economy is becoming more digital than ever. Investors who may not understand tech-focused companies could follow in Buffett’s footsteps and basically ignore the sector or invest in a relatively easy-to-understand company like Apple.
However, another option is to learn more about a company and listen to quarterly earnings calls. It takes more work, but will also give you the tools you need to sustain a business through tough times and let the investment thesis come to fruition. And if the investment thesis starts to change or the company loses its edge over the competition, you’ll be in a better position to exit the position and avoid a knife falling.
3. Greed and fear
Typing it all together is Buffett’s famous quote: “Be afraid when others are greedy, and greedy when others are afraid.” The advice applies perfectly to buying the US-China trade war-induced sell-off at the end of 2018, the 2020 sell-off, and will likely apply well to the current sell-off. in which we currently find ourselves. However, the advice to be scared when others are greedy is also worth discussing.
Many growing companies have seen their valuations soar to astronomical levels that were not based on fundamentals or even the most optimistic forecasts. When this happens, Buffett’s advice is to be scared, as it could be a sign of an unhealthy stock market.
Buffett is a firm believer in finding value where others aren’t looking. In many ways, the oil and gas industry was full of high-yielding dividend stocks and value stocks that investors ignored in favor of renewable energy and flashier names. Carbon neutrality is the future. But the world is still running on fossil fuels. Buffett’s ability to take criticism and invest in “ugly” stocks has allowed him to make some brilliant buys, such as the acquisition of some of Dominion Energyenergy infrastructure assets in July 2020the gradual accumulation of Chevron Stockand other investments made through Berkshire Hathaway Energy, the conglomerate’s energy arm.
Keep your cool when times get tough
When your screen is painted red and stocks keep falling with no end in sight, it’s easy to panic and make a decision you might regret later. Drawing on timeless investing lessons, investors have a few tools they can use when times get tough. Instead of downplaying the emotional side of investing, it’s often better to embrace the associated emotions and try to make the best decision possible with what you know.
One of the most comforting facts to rely on is the long-term performance of the US stock market. This track record tells us that each sale turned out to be an excellent long-term buying opportunity.
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Daniel Foelber offers the following options: $145 Long Call January 2024 on Zoom Video Communications, $45 Long Call January 2024 on Peloton Interactive, $150 Short Call January 2024 on Zoom Video Communications and $50 Short Call January 2024 on Peloton Interactive. The Motley Fool owns and recommends Apple, Berkshire Hathaway (B shares), Peloton Interactive and Zoom Video Communications. The Motley Fool recommends Dominion Energy, Inc and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares) , short Jan 2023 $265 calls on Berkshire Hathaway (B shares) and short $130 calls in March 2023 on Apple. The Motley Fool has a disclosure policy.
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