Last month was a reminder to stock market investors that share prices don’t always go up, despite the record of the past eight years. In March 2009 the Dow Jones Industrial Average was less than 7,000, but since then it had an almost uninterrupted gain to 26,617 on Jan. 26 of this year.
Since that date, there have been swoons measured in hundreds of points, and the 1,500+ point selloff since then is causing some investors to reach for Maalox.
In an effort to spare our investor-readers the unpleasant effects of stock market indigestion, we recommend The Independent’s famous owner — Berkshire Hathaway. Specifically, we turn to Berkshire CEO Warren Buffett, who writes a letter to shareholders this time of year.
Buffett’s messages to shareholders (and the public) have been going on for more than 50 years. His advice is common sense, and a turbulent stock market is a good time to study his thoughts. They are excellent guidance for anyone who wants to accumulate or manage wealth, so we summarize a few here.
First, when buying stocks, view them as owning pieces of businesses rather than pieces of paper whose prices wiggle around from day to day. Pretend you are going to buy 100 percent of a business. If you understand and have confidence in a business and its management, and can buy the business at a fair price, your chances for success are greatly increased.
Next, never borrow money to buy stocks (or mutual funds). Good investments often go down in value, and sometimes a lot! Being forced to sell perfectly sound investments at low prices in order to repay a loan should be avoided at all costs. It is a self-inflicted, unnecessary error.
Since occasional stock market declines should be expected, treat them as opportunities to add to sound investments at favorable prices.
When buying stocks or mutual funds, you must expect to own them for at least five years, and preferably 10, 20 or more years.
Ignore so-called aids such as charts, targets, timing services, etc. Nobody can reliably predict short-term stock market movements.
Buffett’s views on investing are not secret, and his success is undeniable. Yet it is surprising how few people actually implement them. Perhaps they are too dull (not enough “action”) or require too much patience and discipline.
Come to think of it, patience and discipline work for just about everything in life … right?