Warren Buffett's Investment Advice: Why It's So Hard to Follow

by Carlos Portocarrero on 18 March 2010 17 comments
Photo: Art Comments

A year ago, I wrote a piece called Cash is King: Now What Should I do With It? 

After going through all the responsible options of what I could do with our pile of cash, I added one last one: what if I just threw it in the stock market and tried to double it?

Obviously, the fear of getting stabbed and divorced by my wife told me that this wasn't worth it—the risk was too high.

But you always wonder...what if...?

Chart of the S&P 500

You'll see that the market had just bottomed out and was on a path to a steady recovery. Maybe it wasn't such a crazy idea to invest that pile of cash after all.

What Would've Happened

The day I published the story, the S&P 500 was at around 814. If I would've invested $10,000 in the S&P, I would've bought just over 12 "shares." Today, those "shares" would be worth $14,238. That's a 42% return in just under a year—an outstanding return.

What this Has to do With Warren Buffett

I've said this before many times: I'm a huge fan of Warren Buffett. I think his mix of intelligence, patience, and quirkiness is admirable. And one of his most famous sayings applies to my whole dilemma of investing (or not investing) my pile of money a year ago:

Be greedy when others are fearful and fearful when others are greedy

Back in March 2009, everyone was scared. From mutual fund managers to your average mom and pop store—we were all scared. No one knew what was going to happen to the economy and the stock market had just annihilated millions of dollars of people's money. It was the perfect time to put Warren Buffett's axiom to the test.

But that's where the problem lies: I was one of the people that was scared. There was no way I was putting all my hard-earned money into a machine that so many were saying was broken and had already cost so many people their life's savings.

And this is why Warren Buffett commands so much respect: he not only talks the talk, he walks the walk. He reacts differently than the rest of us to these situations: he trusts his instincts and doesn't get caught up in the panic that most of us do. And believe me, back then there was quite a bit of panic.

This is why we can't simply "invest like Warren Buffett." You have to have the cash, the brains, and the ability to overcome panic and fear. Forget about picking the right stocks—that's the least of it—the hardest part is not falling for all the hysteria and panic in the air.

The opposite is also true: the next time you see people acting greedy and feeling a little too comfortable with themselves and how much money they're making in the stock market—watch out. Something bad is about to happen. 

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Guest's picture
Raghu Bilhana

What would you say now about investing? Are people starting to get greedy, so should we become fearful?

The DOW has reached 11,000 and I think there is some sort of bubble building over there. The basic fundamentals of the economy have not changed much since a year ago. Unemployment is still at around 10%, economy is growing only at a rate of around 2.5%. I dont see much change in the underlying economy for the stock market to see a 75% growth from its lows.

Guest's picture

This is so true. It's so hard to remove your emotions from your investment decisions. It seems counterintuitive to invest when you and everyone around you is scared, but those are the best buying opportunities.

We all need to learn to be more like Buffet and not let our emotions cloud our decisions.

Guest's picture
kt

this is true that warren buffett's advice is much easier said than done in the most cases particluarly if you have tried another investing formula like timing the market or something. I think that someone who gets exposed to warren buffett's way of investing at an early age stands a better chance at following the advice than people trying another formula. I read the intelligent investor and the oracle said that he was taught the fundamentals of value investing fresh out of teenage. so in a nutshell, i think that it is better to start early when going into value investing

Guest's picture
Q

Further to this theory, by investing in the market when people were scared, Buffet played an active role in recovery. He inspired investor confidence and aided struggling companies in the turn around. Brave investing in a down market is certainly more palatable than bailouts!

Guest's picture

This post runs contrary to Buffett's main philosophy of buying good undervalued companies and holding the stock... for almost ever.

He would never jump into the market just because it had taken a beating for a period of time. He would do the due diligence on some companies and then invest in them if he thought the fundamentals were sound and the long term prospects were favorable. The fact that the market had lost value might indeed make some companies attractive that would have had less value at the pre-devaluation levels.

If you follow Buffett's REAL strategy, and you have confidence in the companies in which you're investing, it's much easier to do the right thing and not panic too much about your investments.

Otherwise, if you're just trying to time the market, you're gambling!

Guest's picture
Gary

I always enjoy reading about Warren, his lifestyle, his financial
successes and the like....however unless you are a player in his
league it's hard to imagine that what he does in the markets has
anything what so ever to do with what I can do in the market. Main reason has
to do with the number of zeros following the dollar sign we both have to invest. If you invest many millions at a clip "you are the market" for that stock...you control your own destiny with that kind of horsepower. My suggestion as an individual family type of guy with
a few bucks to invest...leave it to the pros and go sailing or
fishing or what ever else makes you happy, otherwise you'll do nothing but make costly mistakes trying to mimic Warren.

Guest's picture
CB

Following Warren Buffet's advice to buy good companies, and not confusing the price of a stock with its value, is what pays off. When the market as a whole goes down, the stock of companies that are of solid value can be bought for less. Of course, one has to spend a little time to research that company. Know its facts, such as return on investment, equity, price per share, cash, and sales over 1, 5, and 10 years. Read the annual report. Pick a company that you care enough to research a bit. The internet allows us to know much more about companies.

I'm working my way through Town's books "Rule #1" and "Payback..." to learn how to evaluate a company so that I know when to buy and if I need to sell it, based on the continued value of the company.

Phil Town's point is that the individual investor can be a lot more nimble, and he recommends owning about five indivdual stocks that one considers as one's own companies (shareholders are the owners), as Warren Buffet does (although Buffet's holding company does own the companies).

Only a few of the fund managers beat the stock market indexes, but they always siphon off fees, coming up or going down.

Guest's picture
The Rat

Great post. I think a lot of people were scared in 2009. I know I was. Even though my gut was telling me one thing, my mind wouldn't mentally allow me to buy into a lot of unbelievable stock deals. Maybe that's why Buffet is so good at what he does. He's in a league of his own.

Guest's picture

Great post.

I was fortunate enough to read the quote from Buffett just around the time the market tanked. I decided I would follow his advice and I invested some money (albeit a small amount, but all of what I had) into index funds. I am thankful I took that course of action today, because I earned an excellent return in a year.

Many times following the sheep has its downfalls. Buffett is a leader, and a free thinker. Sometimes you just need to go against the grain and you end up reaping the rewards.

Carlos Portocarrero's picture

Buffett is obviously in a league of his own, but a year ago was a pretty unique point in time—crashes like that don't happen all the time. 

As for Phil Town, I liked his first book even though I get more and more skeptical over him as time goes on for some reason. Not sure why.

The Writer's Coin  |  Follow me on Twitter

Guest's picture
Stephen

Warren Buffett's investment advice is easy to follow -- he recommends that investors should put their money into low cost index funds. Many investors who followed an indexing strategy (well diversified across asset classes) and stayed the course have done quite well over the past few years.

Guest's picture
Lifting the blinders off American Eyes

Hmm interesting to peddle advice about "risk" when one sitting on a "pile of cash" such as that of Warren Buffet.
I too would be taking great risk if i had millions/billions to piss away such as Warren does.
It's a whole other story when one is a single parent with two kids to support on a modest income.
By the time Buffett had his first child in late 50's his personal savings was over 175K that equates to about half a million dollars in todays money. With that money he opened a brokerage firm in 1959 and three years later he was a multimillionaire by 1950's/60's standard.

In addition, he had a father who was a well educated, well to do businessman who owned his own brokerage firm. His grandfather owned his own successful business as well. So it's not like he didn't have some source of family "support" in the eventuality of his ventures collapsing.

Fast forward to today and people forget that Buffet has had market losses as well:

"Buffett's Berkshire Hathaway suffered a 77% drop in earnings during Q3 2008 and several of his recent deals appear to be running into large mark-to-market losses."

"In 2009, Buffett divested his failed investment in ConocoPhillips, saying to his Berkshire investors "I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong."

On the personal side, he disowned his "adopted grandaughter" for participating in a documentary that "exposes the increasing
growing wealth gap between America's wealthy elite and the citizenry on the whole."
Aparently that film didn't sit well with the "elitist" grandpa.
A true philanthropist and human being concerned with the social welfare of others would have applauded her.

So before you dive into following the advice of a "guru" millionaire/billionaire consider the following:

1. Billionaires aren't always right
2. They don't necessarily have other people's financial
interest at heart when they peddle advice.
3. Often times they become wealthy and remain so at the expense
of other's health and wellbeing (re: Warren 7+% ownership of
Coca-cola despite proven health hazard to children)
4. They have more money than YOU so they can afford to lose big
and still remain millionaires

You always have to ask the question "What do they have to gain when they open their mouths to talk to little ole you?"

Carlos Portocarrero's picture

@Lifting: Don't be a hater now: Warren's the man. Don't hate him 'cause he's special.

The Writer's Coin  |  Follow me on Twitter

Guest's picture
RICKLEE

Enjoyed your post. I remember Buffett's positive outlook on stocks in late 2008 or early 2009. It bolstered my desire to find great companies at good prices. I got back into the market in July 2009 and was glad I did.

Those who have less money than Buffett say he can afford to risk his billions, and with such a big wallet he moves, or is, the market. However, I recall Buffett saying he hates to risk money, and that those who have small portfolios should outperform the big players. Who is right? I'm think Buffett's right.

Guest's picture
Guest

It is difficult to invest like Warren. You have to filter out all the morons warning the end of the world.

Guest's picture
Joe

Invest like a robot. Automatic investment each month helps me deal with the manic behavior of the market at times.
Disclosure: i just started this. It's an unproven theory. I'll let you know how I do.

Guest's picture
Alex

I think Buffett's way of managing investments is great, but there are other investors, who are doing great as well; each having their own mindset and strategies.

I think, the biggest challenge today is to cope with the immense flow of information, and to filter out those things that are important and relevant, and to discard the rest. You can buy shares using Buffett's methodology, but you need to have a stomach of steel to not get sucked into all the emotion, and to stick to that strategy no matter what happens.