Warren Buffett is widely regarded as one of the most legendary investors of all time. Building off the ‘Father of Value Investing,’ Benjamin Graham, Buffett has consistently been able to find winners in the market, and invest in companies that go onto substantially outperform the market. In an interview he conducted, he explains some of his methodologies behind this, why he does so well, and some common pitfalls for investors to avoid.
Buffett actually believes investors have a substantial advantage over most other industries. He uses baseball in this example, referencing a book by Ted Williams called, ‘The Science of Hitting.’ Unlike baseball, however, Buffett believes being in investing is a ‘no called strike business’ meaning he can wait as long as he wants, but never has to swing. That means Buffett can wait as long as he’d like before taking a ‘swing,’ or buying into a business.
Buffett went on to say, “I can look at 1,000 different companies and I don’t have be right on every one of them, or even 50 of them, or even 25 of them. The only way I can have a strike called is if I swing and miss.” Buffett went on, saying, “So I can pick the ball I want to hit and I can wait there and the pitcher can throw pitch after pitch and if they’re not in my sweet spot, I don’t have to swing. That’s an enormous advantage over most businesses.”
Berkshire Hathaway Inc. (BRK.A)(BRK.B), as top investment portfolio manager, might occasionally receive pressure to buy something or make a move. But most individual investors don’t have that pressure, so it’s best to wait for the perfect pitch, then swing hard.
One thing most investors enjoy about the stock market is the easy access to liquidity. This means that after you ‘swing,’ you can quickly turn around sell if you think you made a bad decision. That means while making a good bet is important, it’s easy to get out of a losing position if investors aren’t as happy with the results.
However, Buffett thinks this is actually a crutch for most investors. Buffett said, “There’s a temptation for people to act far too frequently in stocks simply because they’re so liquid.” The best thing to do? Buffett says, “The main thing to do is just buy into a wonderful business and just sit there with it.”
Studies have shown that more than 97% of day traders lose money over time. This means the odds are stacked far against active traders, hammering home Buffett’s point that trading is a crutch. Conversely, simply holding the S&P 500 (SPY) over the past decade would have resulted in a 205% increase in your holdings.
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