The internet is awash with Warren Buffett tips and quotes, and I can’t help wondering if the man himself might be getting tired of hearing them. I hope not, because they’re timeless and bear repetition. I love his first rule of investing: Never lose money. And rule 2: Never forget rule 1.
It might sound obvious, but it marks a total opposite to the way many investors think. We tend to focus on maximising our gains, and that can lead us to take our eye off the risks. But if we prioritise avoiding risk, we’re likely to do better in the long term.
Now, I won’t go through a whole string of Warren Buffett quotes today. No, I just want to turn to the one that means the most to me during the 2020 stock market crash. And it’s actually more of a tip than a direct quote, but I reckon it still counts.
My top Warren Buffett tip
Warren Buffett suggests that we should only buy shares today if we’d be happy for the stock market to close tomorrow for 10 years.
On the face of it, that just sounds like a way of saying we should only invest for the long term. But when I look a bit deeper, I think it’s way more powerful than that. And it’s hitting home with me this year more than ever.
I’ve had bigger individual losses in the past than this year, but I’ve never before seen my whole portfolio suffer as badly as it has in 2020. But if the market had closed at the end of January, I’d never have seen the fall, as it wouldn’t have happened — because nobody would have been able to buy or sell.
The measures that count
It’s not the same as just not looking. I’d still know things are happening, and that they must be bad things. But if the market was closed all year, and next year, and so on… how would I evaluate my investments? Well, I’d look at the same things Warren Buffett does.
I’d examine the companies themselves and their fundamental performances. That means looking at profits, losses, debts, dividends… and not a thing about the share price at all. I’d conclude they were having a tough year, that’s for sure. But I’m convinced that not one of the companies I own is fundamentally unsound.
And when the market re-opens in 2030, I’d expect to have had a good decade for profits. And that would surely mean higher share prices.
What it really means
And that tells me what this piece of Warren Buffett advice is really all about. It’s not just saying that we should invest for the long term. No, its true meaning is that share prices simply don’t matter. Between the day we buy and the day we sell, ideally decades apart, the share price is utterly meaningless.
It’s the least important measure of a company. Yet it’s the first thing that most investors look at every day.