What Would Buffett Do In This Market?

The Motley FoolHere is a bit of Zen thinking to kick off this week’s article. This article first appeared in our Take Stock Singapore. For those of you who don’t already subscribe to our FREE newsletter, you can do so here.

The esoteric question I have in mind is this: How do you know what a fish is thinking if you are not a fish?

The answer is you can’t. The same, I suppose, might be said about trying to second-guess Warren Buffett. We are, after all, not Warren Buffett, so how can we possibly know what the greatest investor of our lifetime might make of the current market turmoil.

Stepping into Buffett’s shoes

Thankfully, for us private investors, we don’t need to be Warren Buffett to think like him. The Sage of Omaha has, over the years, revealed so much about his style of investing that it is relatively easy for us to step into his shoes and think along the same lines as he would.

For instance, Buffett once told investor: “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it“.

Thing is, market fluctuations come in all shapes and sizes. What’s more, the causes may be as trivial as a fat-finger error somewhere in the world or something weightier such as a sudden loss of appetite for shares by traders.

Some gyrations might show up as short-lived dips, while other market swings could be more prolonged and severe. But whatever form the fluctuation might take, it is important to appreciate that the intrinsic or underlying values of your investments have probably not changed at all.

Stupendous Straits Times index

Consider, for example, our benchmark index here in Singapore. Since 1987, the Straits Times Index  (SGX: ^STI) has registered monthly falls on 134 out of 308 calendar months. Additionally, on 18 separate occasions, the index has fallen by more than 10%.

On the other hand, though, the index has risen by more than 10% in 11 of those 308 months. The net result of the monthly gyrations is a gain of around 291% over the last 25 years. That equates to a rise of around 5% a year, every year, before dividends are included. If you factor in dividends, you have a stupendous total return of about 8% a year.

The upshot is this: Not only should you stay invested but, if you can, try to take advantage of the market fluctuations by investing more when share prices fall.

Warren Buffett also quipped: “There seems to be some perverse human characteristic that likes to make easy things difficult“. Buffett’s observation is spot-on. Investors have a terrible habit of over-analysing situations and overreacting to events that often have very little bearing on the shares they own. The end result is often a severe case of analysis paralysis.

Keep things simple

Buffett’s comment is not a million miles from William of Ockam’s theory of logic, which was proposed back in the 13th Century. His philosophy, which is known as Ockham’s razor, states that “Entities should not be multiplied unnecessarily”. Or put another way: Just keep things simple.

When applied to investing, it means that we should focus on what really matters, namely the economics of the businesses that we own shares in. If a company is doing all the right things to grow its business profitably, then the share price should reflect that over time. It may not happen immediately but in time it should.

Unfortunately, many of us tend to use share prices as a barometer to gauge our success or failure when investing. But as Buffett pointed out about his own investments: “We don’t need a daily quote on our 100% position in See’s or H.H. Brown to validate our well-being. Why then, should we need a quote on our 7% interest in Coke?”

Successful investing is about having absolute confidence in the companies that we choose to be a part-owner of. But to do so, we have to understand how the business functions and, more importantly, how it goes about making money.

If you can do those two things well, then you are unlikely to fall into the trap of letting fear of the unknown (of which there are many) deter you from investing, even when anxiety about macroeconomic events is at its highest (which can be often).

In other words, you are on your way to becoming a better investor.

This article first appeared in Take Stock Singapore.

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