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Wednesday, August 26, 2009

Investing Wisdom From a Master

"An investment in knowledge always pays the best interest"
Benjamin Franklin

Investing Wisdom From a Master
Austin Pryor
Sound Mind Investing

There is probably no one more respected among investment professionals than Warren Buffett, yet he remains relatively unknown to millions of investors.

Although he does appear on news programs from time to time, Buffett prefers to keep a low profile by living in his hometown of Omaha, Nebraska, away from Wall Street's hectic pace. He's never written a book on investing. He rarely gives newspaper interviews or talks to market analysts.

But at a time when investors are desperate for timeless advice from those few who have lived through these types of markets before, his investing philosophy is especially worth considering. It might be summed up as follows:

1. Buy for value. Buffett views the business world as being divided into two groups. In group one are a small number of wonderful businesses to own. They can be counted on to provide excellent returns to their owners for years to come, regardless of what the economic environment may look like. In group two is a huge number of average businesses that are not attractive as long-term investments, and in which Buffett would have no interest at any price.

On rare occasions, such as we're experiencing now, the stock market becomes preoccupied with the negatives dominating the news. As a result, the stock prices of even the wonderful businesses drop sharply. When such stocks are unpopular and bargain-priced, that is the time to buy them boldly. Buffett pays no attention to current gloomy economic and stock market forecasts.

He made a rare public comment to this effect in a New York Times last October. Was he a tad early? Sure, but when your investment time frame is measured in decades, you don't worry too much about being a few months early or late.

2. Buy with patience. Obviously, if you're willing to go shopping only when there's a big clearance sale, you might have to wait awhile between purchases. The advantage the stock market offers is that the investor can wait indefinitely until the right opportunity comes along.

As Buffett tells it, using a metaphor from baseball: "Every day you literally have thousands of major American corporations offered to you at a price, and nothing is forced upon you. There are no ‘called strikes' in this business. The pitcher just stands there and throws balls to you and you can let as many go by as you want without penalty. They may be wonderful pitches, but if you don't know enough, you don't have to swing at any of them. Finally, you get one right where you want it, something that you understand and is priced right, and then you swing."

Unfortunately, the media (along with well-intentioned friends) is like a huge crowd of bystanders yelling "Swing!" on every pitch. Buffett recognizes this with his comment: "You get overstimulated on Wall Street and you have lots of things that shorten your focus. A short focus is not conducive to long profits. What you need is patience."

3. Buy with confidence. It's vital to have the self-confidence that comes from preparedness and knowledge. The fact that other people might agree or disagree with you makes you neither right nor wrong. You will be right if your facts and reasoning are correct.

If you lack confidence, fear will control your decision-making. Rather than thinking "Buy" as the market falls, you may instead find yourself screaming, "Sell!"
Buffett's entire philosophy makes clear that some stock purchases may take years to reach their potential. While you're waiting, you don't want to be forced out of your position because you need the money for something else.

This is why it's essential that you invest only from your surplus (with funds you can afford to risk) — as we advise via our Four Levels approach. If you haven't yet paid off your consumer debts (Level 1) and established an adequate emergency-savings reserve (Level 2), you're not quite ready to be risking money in the markets here at Level 3 (unless, of course, you already have money invested via a retirement plan at work or something similar).

You can learn more about the investing philosophy and strategies of Warren Buffett by reading the annual letters he has sent his fellow shareholders in recent years. Among the exhibits included in his February 2009 letter is his track record dating back to 1965: average annual gains of 20.3% compared to 8.9% for the S&P 500 — with only two losing years in the process. (Yes, he is human. As was true for most investors, 2008 was Buffett's worst year ever, though he was able to limit losses to -9.6%.)

A final thought: When you think of Wall Street, do you think: excitable, loud, fast paced, emotional, faddish, short-term, in-on-the-action, buy-sell, in-out, get-rich-quick? Then you'll be interested to know that Buffett's approach is calm, soft-spoken, patient, thoughtful, purposeful, long-term oriented, remote-from-the-action, stay-invested, get-rich-slowly.

What does that tell you?

© Sound Mind Investing
Published since 1990, Sound Mind Investing is America's best-selling financial newsletter written from a biblical perspective. Visit the Sound Mind Investing website .
Take care until…......and God Bless ya

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