How to invest like Warren Buffett and ride out market downturns


Good investing looks easy but isn’t simple. Discipline is a necessity. Learn how Warren Buffett followed some simple lessons and won big.

“In the short term, the market is a popularity contest. In the long term, the market is a weighing machine.”

This is perhaps the most well-known quotation from Warren Buffett. It may have been said by Benjamin Graham. No matter, but what does it mean?

Short-term results are driven by emotion, whims, panic and elation, plus a pinch of popularity. This means that the investor will experience swings in value.

The long term, which means a decade or more, levels out the swings and concentrates on the fundamental value. The intrinsic value of the company will be the key driver of the price, not individual whims.

How to invest like Warren Buffett

Unless you have the odd billion to hand, it is impossible. And your future investing time period will differ to the last 60 years or so.

Warren Buffett is an investment pioneer who built a sprawling empire over six decades. Many books have been written about his approach and there are simple lessons you can adopt to improve your investing experience.

Warren Buffett invests in companies and concepts he understands. He admits this might mean he has missed good investment opportunities, but it has stopped him from being burned. When it comes to your life savings, a modicum of appropriate caution is sensible – so that you can avoid being burned.

As you, and 99% of investors, likely won’t have the same level of investment knowledge as Warren Buffett, including this rule when deciding your investment strategy is a good rule of thumb. Many investors end up investing in complicated financial products. The fog of investment jargon and complexity surrounding these products stops you seeing the risk until it is too late.

Unless you are an experienced investor and feel comfortable in the world of leverage, derivatives, and the alphabet soup of investing nomenclature then you should rely on tried and tested methods, especially when it comes to your life savings.

Some simple rules to follow

Buying and holding investments for the long term is an investing vow you’ve likely heard before; it also happens to be a rule of Warren Buffett’s. As Warren Buffett believes in his own investment strategy and decisions, he lets them play out. If the foundations of your investment strategy are based on robust and defendable decision-making, then you should allow your decisions to play out.

Statistics suggest the average investor reacts emotionally to economic or political news. Whilst acting on receipt of new information may feel sensible, it typically reduces investment performance. Instead of reacting to opinion pieces promising revelations or apocalyptic events, rather focus on the long-term performance of your investments and remain steadfast.

“Don’t just do something, stand there.”

Frequent changes to your investment portfolio may be driving up the cost of your investments. You may have noticed the cost disclosures produced by your existing financial adviser or investment provider under MiFID II regulations includes the full cost of transactions. Trading frequently by you or your investment manager can increase the cost of investing and be a further drag on investment growth. So, keep trading to a minimum.

From Buffett’s perspective investors are better off adopting low cost, tracker investing as their investment strategy. To demonstrate the strength of his convictions he wagered $1 million that a low-cost tracker fund would outperform a premier New York based hedge fund manager – Protégé Partners.

You may have read some press detailing the active versus passive management debate, and with his bet Warren Buffett waded into the conversation. Buffett won the bet. In fact, the margin between strategies was more than you may expect – 7.1% per year versus 2.2% for the active hedge fund manager.

In real terms, the $1 million in Warren Buffett’s strategy produced $1,854,000 at the end of the period or $1,220,000 if adopting the Protégé Partners style, a gap of $634,000. Buffett acknowledges that some active managers do outperform the market from time to time. But, knowing which manager will outperform over the next ten years is 100% guesswork.

“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”

To understand more about why investment costs matter, read this blog.

Investors should adopt an evidence-based strategy when investing; allocating their life savings amongst low-cost index funds based on proven research and tested methods.

For the typical investor Warren Buffett’s investment ideas have the following practical applications:

  • equities, bonds, property, and cash provide ample investment opportunities for the typical investor;
  • avoid investment managers and advisers who chop and change investments;
  • adopt an evidence-based strategy that makes your money work for you;
  • buy and hold, avoiding fads and trends.

If you’d like to support your lifestyle, retire comfortably, or leave a legacy for your family by investing then please get in contact with Capital. 

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