So, what does it take to become one of the world’s richest and most respected investors?
For Warren Buffett, a 93-year-old American who lives in Omaha, Nebraska, in a house he bought back in 1958 for $31,500 the answer is simple: be a contrarian.
At the start of August, Buffett filed as having sold $50bn-worth of Apple shares, cutting his stake in the tech giant by around half. This has sparked interest and speculation around the market. While Buffett himself hasn’t provided a detailed explanation for these specific actions, we should expect the unexpected.
Buffett, known as the ‘Oracle of Omaha’, has built a personal fortune of more than $100 billion by going against the crowd and buying undervalued stocks that others shun. He is the epitome of a value investor, who believes the value of the market, or a stock is below its intrinsic value.
Buffett once said that it’s wise for investors ‘to be fearful when others are greedy and to be greedy only when others are fearful.’
Why should investors be fearful when others are greedy?
Often investors’ decisions are driven by human emotions such as fear and greed. For example, greed can result in investors buying and bidding up prices in the market, hoping for ever-larger returns and profits.
A value investor looks to purchase stocks that are trading below their intrinsic value – the perceived or true value of an underlying asset. This doesn’t always equate to the current market price because assets can be either over or undervalued. Price is what you pay for an asset and the value is what it’s worth. If an investor pays too high a price, then the potential returns can be severely impacted.
When making investment decisions, Buffett looks to invest at a good price and takes advantage of opportunities when others are feeling fearful. As he has famously said in the past, ‘it is much better to buy a wonderful business at a good price than a good business at a wonderful price.’
Buffett and his long-time friend Charlie Munger, who served as Vice Chairman of Berkshire Hathaway until he passed away just shy of his hundredth birthday in late November 2023, began operating Berkshire in 1965. During that time, the stock has risen at an annualized pace of 19.8%. The S&P 500 has had an annualised return of 10.2% within the same timeframe.
Adopting a value-oriented mindset might mean looking beyond popular stocks or sectors and considering investments in areas that may be temporarily out of favour but have long-term potential. This requires patience, a deep understanding of the companies you invest in, and the ability to stay calm during market fluctuations.
What can we learn from this?
Buffett’s emphasis on holding cash to seize opportunities is also a valuable lesson. In a small market like New Zealand, where investment options may be limited, having a cash reserve can allow investors to act quickly when attractive opportunities arise, providing liquidity, income and diversification.
While the principles of value investing can be beneficial, it’s essential for investors to adapt these strategies to their local market conditions and personal risk tolerance. For those looking to deepen their understanding of these concepts, Warren Buffett’s annual letters to Berkshire Hathaway shareholders are a goldmine of insights.
Additionally, reading The Intelligent Investor by Benjamin Graham, Buffett’s mentor, can provide a solid foundation in value investing. By applying these timeless principles with a local perspective, New Zealanders can work towards building a robust and resilient investment portfolio.
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This has been prepared by Jarden Wealth Limited (Jarden) which holds a licence issued by the Financial Markets Authority to provide a financial advice service. The information in this research solely relates to the companies and investment opportunities specified within. The nature and scope of any financial advice included within that research is limited to generic and non-personalised commentary about that investment only. For more information on providing financial advice, please see our publicly available disclosure statement, https://www.jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/.
