By now, most investors would be aware of just how brutal 2022 has been for ASX shares and the share market. Since the start of the year, the S&P/ASX 200 Index (ASX: XJO) has lost a nasty 10.55%. But many ASX shares have lost more than that. So in these dark days, what better time to turn to the teachings of one of the greatest investors of all time: Warren Buffett.
Warren Buffett, of Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B) fame, may be in his 90s but his investing philosophy is still undeniably and timelessly potent. So let's discuss three pieces of Buffett wisdom that I think can help investors steer the ship through the rough seas of 2022.
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3 doses of Warren Buffett wisdom that we all need right now
Take advantage of volatility
Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get'. Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.
Buffett often speaks of his bafflement that investors seem to panic when shares are cheap, rather than treating a selloff like the Boxing Day sales. At the end of the day, the cheaper you can buy a quality company's shares, the greater your returns will be.
Many of Buffett's most lucrative buys have been executed during market crashes. If you are happy buying a quality company for $100 a share when investors are in an optimistic mood, then you should be overjoyed if a market crash sends that same company down 50%.
Obviously, there are caveats to this. We should be far warier if investors are sending a company down for a very good reason, for example. But remember that Buffett's favourite time to buy is when everyone else is selling.
Buffett buys the company, not the trend
The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.
I see this time and time again in the share market. Investors can make the assumption that if a company is part of a successful industry or emerging trend, then its shares are somehow automatically destined for greatness.
We all saw this play out, for example, in the buy now, pay later (BNPL) space in recent years. Yes, we all know that BNPL grew phenomenally as a preferred payment method. And yet, it seems investors were convinced for a while there that all BNPL shares were worthy of massive share price appreciation.
The sector has now come back to earth. And, arguably, exposed this fad for what it was in the process. It turns out that most BNPL shares didn't have anything close to what Buffett would call a competitive advantage.
Fads come and go all the time in the world of investing. So it might pay off to make sure any company you buy adheres to this piece of Buffett wisdom.
Forget the crowd
The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.
We can all be guilty of obsessing over the day-to-day gyrations of the share market: the ASX 200 is up 1% one day, down 0.5% the next. But all we are doing here is reporting on what the 'crowd' is doing. Buffett is famous for not worrying about the daily moves of shares.
Instead, he is always focused on what he can buy for a bargain. Following the crowd will, at best, get you a market return and, at worst, woeful underperformance. If we instead focus on what the crowd is missing, only then can we hope to beat it.
