Whether 2022 is to be great or problematic for markets is, unfortunately, something we can’t know in advance. With this in mind, I think it’s worth drawing on the wisdom of the best investors around — Warren Buffett — to prepare myself. Here are five tips I’ll be keeping in mind in 2022.
Don’t hoard cash
1. “The worst investment you can have is cash. Cash is going to become worth less over time”
Having cash is never a bad thing per se. It’s important to have something set aside for life’s little emergencies. A few months’ living expenses tends to be the general consensus.
Beyond this, I’m in total agreement with Buffett. Cash erodes in value the longer I hold it. And with inflation in the UK now at its highest level for 10 years (and potentially rising higher in 2022), this tip is about as pertinent as you can get.
Thanks to dividends and capital growth, I think the best chance of outpacing rising prices is the stock market. Consequently, this is where I intend to divert any savings in 2022.
Have patience
2. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”
Trying to know where the share price of a particular company will go next is fraught with difficulty. This is partly why the vast majority of day traders lose money. There’s simply too much noise in the system for people to make great calls, at least consistently.
Buffett is as far removed from a trader as you can get. Knowing that profits lie in being patient, he buys stocks with the intention of holding them for many years. I’ll try to do the same in 2022. On the flip side, the only way I’ll be selling anything is if there’s been a clear shift in the investment case.
Control your emotions
3. “Be fearful when others are greedy. Be greedy when others are fearful”
All investors are potential slaves to fear and greed. The trick, according to Buffett, is knowing how to use them to your advantage. In simple terms, he thinks those wanting to beat the market should do what the majority can’t. Load up when the sky is falling in. Be less enthusiastic when all’s well.
With regard to 2022, a swift reversal in Covid-19 infections will surely bring out the buyers. Higher hospital admissions or a lockdown may do the opposite. I’m planning for both eventualities.
Buy quality
4. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”
In my formative investing years, I lost count of the winners I missed out on by waiting for a great company’s price to hit ‘bargain’ levels. “Just a bit cheaper“, I’d whisper to the market, driven by the thought of buying a wonderful business for a wonderful price.
Buffett’s known for years that great companies rarely go on sale. And as the aftermath of the March 2020 market crash showed, recoveries can be swift when they do.
I have no doubt that at least a few brilliant companies will trade for reasonable — but not cheap — valuations in 2022. The best thing I can do is draw up a wishlist of what I’d like to buy, what’s appropriate to pay in advance and cross my fingers I’ll get my price.