1 Everlasting Tip from Warren Buffett for Success in the Share Market

Credit: The Motley Fool

Warren Buffett is widely considered as one of the most successful investors in history. As the Chairman and Chief Executive Officer of Berkshire Hathaway Inc., Buffett has helped the company achieve a compounded annual growth rate of 20% in its book value over close to 50 years.

The investing maestro has made his fair share of quotable quotes over his long career, and in particular, he wrote this paragraph in his annual letter to shareholders on 29 February 1988 (emphasis mine):

“In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace.”

To put this comment into context, this was the year when the US market barometer, the Dow Jones Industrial Average index, fell 22.6% in a single day. The event shocked even the most seasoned investors, and remains the largest single-day loss in the history of the American stock market.

Although Buffett’s comment was made in 1987, his sage words bear repeating as history shows that market crashes will occur from time to time.

The Panic of October 2008

During the 2008/2009 Great Financial Crisis, share markets around the world were swirling from the effects of the crisis. On 10 October 2008, a newswire article titled “Markets Crash: How Panic Spread Across the World” described how market crashes had become contagious and had swept across the globe.

Singapore’s market indicator, the Straits Times Index (SGX: ^STI), or STI, was not spared – it fell 7.7% on that fateful day. When you read through the long list of share market crashes in the 10 October 2008 newswire, it was easy to see why the vast majority of investors would be rattled by the contagious market crashes which were unfolding all over the world.

Back to Buffett’s advice

However, as Buffett aptly notes, it is the Foolish investors who are able to insulate themselves from the super contagious emotions, and make good business judgements, who would come out on top.

His advice may sound rudimentary at first glance, but consider this: From that fateful day on October 2008 till 25 November 2014, the adventurous Foolish investor who invested in sturdy dividend payers such as health care provider Raffles Medical Group Ltd.  (SGX:R01) or real estate investment trust and private real estate fund manager, ARA Asset Management Limited (SGX:D1R) would have been up 372% and 476% respectively.

Even if the individual investor had bought into the plain vanilla SDPR STI ETF (SGX: ES3) – a proxy to the STI – on that day, he or she would have been up 66% over the same timeframe.

A Fool’s Take

If share markets were all about arcane formulae and computer programs, mathematicians would rule the share market. But they don’t.

Our ability to insulate ourselves from the super contagious emotions in the share market might be the better thing that keeps us sane while everyone else is jumping off the share market. And, history shows that that could be the important differentiator which may bring us success in the share market.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Berkshire Hathaway and ARA Asset Management.