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Business // Thinking Smart
David S. Chang

More Wisdom From Warren Buffett

Warren Buffett is considered to be the world’s greatest investor. The past two articles discussed his incredible success at Berkshire Hathaway and his best investment advice. Please visit artofthinkingsmart.com to see the previous articles.

We end the series this week with more nuggets of wisdom from the Oracle of Omaha and what it means for the average investor.

* “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a … president. Yet the Dow rose from 66 to 11,497 … none of these blockbuster events made the slightest dent in (late economist) Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.”

When picking stocks, Buffett advises us to ignore politics, macroeconomics and world events. Stocks always have come out of a crisis over the long term, and short-term volatility should not dictate an investment strategy.

* “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” Buffett constantly emphasizes investing for the long term. You want to buy a company that will grow regardless of the stock price. Many investors purchase stocks based on historical performance. Buffett states: “The investor of today does not profit from yesterday’s growth.” You want to purchase a stock for its potential growth, not the growth it already experienced.

* “Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men.’ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”

The more you trade, the more you underperform, which is why Buffett’s favorite holding period is “forever!”

* “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”

One of the greatest risks for investors is outliving their money, which is why investing in stocks over the long term is crucial. It is good to be liquid during certain periods, but over the long term stocks are a better investment than cash.

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