Are you ready to take your stock investment to the next level? Look no further than the man who has amassed a net worth of over $100 billion through his investment prowess; Warren Buffett!
As the CEO of Berkshire Hathaway, he has consistently delivered an average annual return of 20% from 1965 through 2020, outpacing the S&P 500’s annual gain of 10.2% over the same period.
Despite his incredible success, he remains humble and always willing to share his wisdom. He frequently offers valuable advice on stock investment through annual meetings and media interviews, including how to navigate the rough waters of a recession or high inflation.
With the current economic landscape of a falling stock market, high inflation, and soaring interest rates, Warren Buffett‘s advice is more important than ever.
In this article, we’ve compiled three of Buffett’s top tips for navigating the investing scene. Get ready to learn from one of the best in the business and take your portfolio to the next level.
Number 1. How to invest in a recession
Warren Buffett has always maintained that investors should be thrilled when the stock market goes down. It’s a great opportunity to buy good stocks at lower prices.
However, he noted that people tend to feel better when the stocks are on the rise, even though they should be doing the opposite. Buffett believes that people should feel good buying when stocks are down and feel less good when buying at a higher price. Unfortunately, in the stock market, people don’t buy during a sale.
Therefore, he introduces people to use the dollar cost averaging method to invest small amounts of funds instead of investing a large sum. With DCA, one can purchase stocks of a company they understand every one or two months, regardless of the market price during the bear market.
Regarding a potential recession, Warren Buffett stated in the 2016 shareholder letter that dark clouds will fill the economic skies every decade or so, and they will briefly rain gold.
When it happens, he suggests rushing outdoors carrying wash tubs, not teaspoons, to collect as much as possible.
Number 2. How to invest with rising interest rates
Warren Buffett has long recognized the impact of interest rates on the value of assets.
Historically, low interest rates have led to higher asset prices, while rising interest rates have caused the value of riskier assets to decrease, making safer investments like bonds and savings accounts more appealing. However, it is still important to consider investment returns in relation to purchasing power.
Example of stock Buffett has held in times of high inflation is banking stocks.
Bank of America is currently one of the biggest holdings in Buffett’s stock portfolio. This bank pays significant dividends and profits from the efforts of central banks to combat inflation.
Although banks do not make money directly from inflation, they profit when interest rates increase, as they pass on the cost to borrowers, resulting in the collection of more interest on their loans.
Bank of America‘s financial report for the second half of 2022 demonstrates this trend, with the bank’s revenue increasing by 8% and its net interest income growing by 24%.
Number 3. How to deal with market fluctuations
Warren Buffett introduced the concept of Mr. Market as a metaphor for the stock market.
According to Buffett, Mr. Market is like a business partner who appears every day and proposes a price at which he will either buy your shares or sell his to you.
Although the economic characteristics of your business remain stable, Mr. Market’s quotes will fluctuate significantly, sometimes being overly optimistic and offering a high price, or being pessimistic and proposing a low one. But regardless of his behavior, Mr. Market will always come back the next day with a new quote.
Buffett’s main point is that investors shouldn’t be overly swayed by Mr. Market’s emotional instability. Instead, they should focus on the underlying conditions of their business and its true value, which is not necessarily reflected in the current market price.
The current price of a share is just one of many factors to consider in day-to-day operations. The more erratic Mr. Market’s behavior, the better for investors, as long as they stay focused on the fundamentals of their business.
And congratulations! if you’ve made it this far, because we have a bonus tip from Warren Buffett just for you! Here is the bonus tip. The best investment against inflation is as the following.
Improve your own earning power
Warren Buffett said, good skills, unlike currency, are inflation-proof. If you have a skill that is in demand, it will remain in demand no matter what the dollar is worth.
Whatever abilities you have can’t be taken away from you. The best investment by far is anything that develops yourself, and it’s not taxed at all.
