Warren Buffett used to think that 'predicting' the stock market was the most important thing in investing — until 1 book changed his life forever. Here's the real key to long-term gains

Vishesh Raisinghani
4 min read
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Warren Buffett used to think that 'predicting' the stock market was the most important thing in investing — until 1 book changed his life forever. Here's the real key to long-term gains
Warren Buffett used to think that 'predicting' the stock market was the most important thing in investing — until 1 book changed his life forever. Here's the real key to long-term gains

Warren Buffett is one of the most renowned investors of our time. So, it’s easy to forget that he was once a beginner too.

Buffett claims he bought his first stock at age 11 and spent his first eight years in the market focusing on stock price movements instead of studying the underlying companies.

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“I had the whole wrong idea,” he said in a 2022 interview with journalist Charlie Rose. “I thought the important thing was to predict what a stock would do and predict the stock market.” Buffett says he even read books on technical analysis and charted stocks.

However, when he was 19 or 20 years old he read a book that would change his perspective forever: “The Intelligent Investor” by Benjamin Graham. Instead of charting stocks or "stock picking," Graham advocated for the valuation of underlying companies. His theory is that stock prices eventually follow the company’s financial performance.

To paraphrase Graham in another one of his books, "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."

This simple philosophy shifted Buffett’s view on investing forever. “I realized that I was doing it exactly the wrong way,” he said. “I rejiggered my mind, when I read the book ...”

This philosophy has worked for Buffett over many decades and could serve retail investors looking for new opportunities in 2024. Here are two companies that seem misaligned with their stock prices this year.

GSK

GSK plc (GSK) is arguably undervalued. The stock currently has a forward price-to-earnings ratio of 9.91. It also offers a dividend yield of 3.5%.

The underlying business is in a transition. Activist hedge fund Elliott Management took a position in the company in 2021, pushing for changes to unlock value. In 2022, the company spun off its consumer health-care division into a new independent firm called Haleon. The spinoff was said to be financially beneficial for GSK. "One of the perks for GSK of the demerger was also a £7bn dividend which helped to reduce net debt of £19.8bn at the end of 2021," reported the Financial Times.

The company has been focused on its core pharmaceuticals and vaccine products. This seems to be delivering growth. In 2023, GSK raised its guidance for the year twice. It expects revenue to be as much as 13% higher and adjusted earnings per share to be as much as 20% higher than the previous year.

Strong sales and a low valuation should put this megacorporation on your radar of undervalued stocks.

Read more: This Pennsylvania trio bought a $100K abandoned school and turned it into a 31-unit apartment building — how to invest in real estate without all the heavy lifting

Alphabet

Google’s parent company Alphabet (GOOGL) is in the midst of an interesting battle. Rivals have deployed billions into large language models and artificial intelligence that some say could erode Google’s dominance in the search market.

“[Google is] the 800-pound gorilla in this [market] … I want people to know that we made them dance,” Microsoft (MSFT) CEO Satya Nadella told The Verge shortly after OpenAI released ChatGPT.

Meanwhile, Jeff Bezos has bet on another AI startup, Perplexity AI, that’s also trying to capture some of this lucrative market.

For now, Google retains its crown as the king of search engines. The platform holds 91.61% market share, as of December 2023, according to data from StatCounter. Google is also actively competing in the AI race with its ChatGPT rival Bard, which is being gradually integrated across the company’s portfolio of apps.

These initiatives could help the company sustain its growth momentum. In the third quarter of 2023, the firm reported 11% growth in revenue and 41.5% growth in net income year-over-year. The stock trades at a forward price-to-earnings ratio of 22.22, which isn’t cheap but could be justified by this robust growth rate.

This fair-valued stock should certainly be on your watchlist for 2024 as the AI race heats up.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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