Is Warren Buffett's Investing Advice Still Useful?
Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) chairman Warren Buffett (Trades, Portfolio)'s recent investment decisions have caused some investors to doubt his ability to continue outperforming the S&P 500.
For example, the Oracle of Omaha sold out of Berkshire's airline stocks during the recent market crash. Buffett also has did not attempt to capitalize on the stock market's low valuations in March. In previous bear markets, he has been a large net buyer of stocks, but he adopted a more cautious strategy this time.
In my view, it is too soon to know if Buffett's decisions over the past three months represent an efficient use of Berkshire Hathaway's capital. However, his long track record of outperforming the stock market suggests that his focus on company fundamentals and his long-term standpoint are likely to be successful strategies for value investors in future.
Investing in quality companies
Investing in quality businesses could become increasingly important due to the economy's uncertain future. Those businesses that have been able to survive over the past decade due to favorable trading conditions may now struggle to service their debt and pay other costs in a weaker economic period.
Therefore, analyzing a company's balance sheet strength and the size of its economic moat could be an efficient use of your time. It may mean that you avoid companies that are likely to experience declining profitability, and instead allocate your capital to businesses that can use changing trading conditions to their advantage.
It may also represent a more productive use of your time than trying to predict how trading conditions will change in future, which is an impossible task in my opinion.
As Buffet once said, "Why not invest your assets in the companies you really like? As Mae West said, too much of a good thing can be wonderful."
An optimistic viewpoint
The uncertain economic outlook has caused some investors to become pessimistic about the economy's future prospects.
The S&P 500 has experienced one bear market every five years on average, and they have usually been short-lived. The average bear market has lasted for around ten months, which is shorter than the average bull market length of approximately 33 months. Furthermore, the S&P 500 has a compounded return of around 10% since World War II, despite experiencing frequent periods of high volatility.
Therefore, a positive outlook on the stock market's prospects could be beneficial to your returns. Being cautious about stock prices may help you to avoid short periods of decline, but it may also mean that you miss out on the stock market's long-term growth potential.
As Buffett once said, "We always live in an uncertain world. What is certain is that the United States will go forward over time."
Limiting your activity
It can be tempting to purchase a large number of companies while they offer wide margins of safety. However, adopting a selective approach to the stocks you purchase may be a more efficient use of your capital. It could mean that you add the strongest businesses within the most attractive sectors to your portfolio.
In addition, some investors may be tempted to adopt shorter holding periods to take advantage of market volatility. However, limiting your amount of activity and holding stocks for the long term can provide them with sufficient time to recover from periods of decline.
As Buffett once said, "An investor should act as though he had a lifetime decision card with just twenty punches on it."
Disclosure: The author has no position in any stocks mentioned.
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This article first appeared on GuruFocus.
