10 stock market wisdom from Warren Buffett
Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, is known for his simple yet powerful investment principles. His success is due to a long-term vision, disciplined decision-making and a deep understanding of companies and markets. It earned him a spot in the top 10 richest Americans after 80 years of investing. In this article, we list ten of Warren Buffett's important stock market wisdom that every investor should know. Of course, Value Square also applies them in the management of its funds.
1. Buy companies, not stocks
Buffett sees investing not as buying stocks, but as acquiring part of a company. This means you should analyze a company as if you were buying the entire company. Look at the fundamentals, such as profitability, management quality and competitive position, and don't be swayed by short-term price fluctuations. A company with a strong brand, loyal customers and a proven revenue model will usually be more successful in the long run than companies that focus only on rapid growth without a solid foundation.
2. Be greedy when others are anxious
Buffett stresses the importance of counterfactual thinking: "Be fearful when others are greedy, and be greedy when others are fearful." This means buying when the market is pessimistic and selling when the market is overly optimistic. Major crises often offer the best buying opportunities. During the 2008 financial crisis, for example, Buffett invested billions in companies like Goldman Sachs and Bank of America because he knew these banks would recover in the long run.
3. Quality over cheap bargain
Buffett would rather choose a great company at a reasonable price than a mediocre company at a low price. Although in his early years he was more focused on buying undervalued companies, he later realized that quality is more important in the long run than a low valuation. He compares this to buying a great house at a fair price rather than a dilapidated house at a bargain price.
4. Patience is the key
Buffett is a staunch advocate of long-term investing. He believes time is an investor's most powerful ally. "The stock market is a mechanism for transferring money from the impatient speculator to the patient investor." This means not trying to time the market, but sticking to quality investments for the long term. The magic of compound growth plays a big role here: the longer your investments pay off, the greater the ultimate return.
5. Invest in companies with an economic moat
Buffett favors companies with an "economic moat" - a sustainable competitive advantage that industry peers find difficult to overcome. This may come from, for example, brand strength, economies of scale or patents, or high switching costs for customers. Companies with a strong economic moat are more resilient to competition and economic setbacks. Consider companies such as Coca-Cola and Apple, which have strong brands and loyal customers who do not readily switch to competitors.
6. Management matters
Buffett looks not only at a company's financial numbers, but also at the people who run it. He looks for companies with honest, capable and visionary managers. But above all, the integrity and shareholder focus of management are crucial. He himself sums it up with a typical one-liner: "You can't do good business with bad people."
He avoids companies with high staff turnover on the board, and CEOs who pay themselves lavish bonuses or option packages. He prefers to buy companies from entrepreneurs who themselves invested money in the firm, or founded the firm with their own pennies: they often have the best attitude for handling co-investors' money.
Not surprisingly, investing in companies with a family or strong reference shareholder is also one of the cornerstones of Value Square's investment strategy.
7. Avoid the hype
Hypes in the stock market are dangerous because they tempt investors to make irrational decisions based on mass psychology rather than fundamental analysis. When a particular new technology appears on the scene, a particular stock, sector or asset class can suddenly become wildly popular due to excessive optimism. The price may rise far above its true value.
This is a recurring phenomenon in financial history. Think of the tulip bulb mania, the bicycle manufacturer hype of 1890, the radio boom of 1920 or the bowling bubble of 1950, where bowling centers were propelled to insane valuations.
Often companies with minimal profits or even without a clear business model are traded at exorbitant valuations, purely because they are seen to represent the future, but estimate it too rosy. This leads to the illusion that share prices continue to rise endlessly, but as soon as sentiment turns, a painful correction follows.
Hypes are amplified by media coverage, social pressure and the urge not to miss opportunities, so inexperienced investors often get in at the peak. At the time of writing, we see the AI hype partially deflating on U.S. stock markets, while Europe is experiencing exaggerated enthusiasm in demand for defense stocks.
However, hypes usually do not arise on things that have no value. In most cases, some winners do emerge (think Amazon from the Internet bubble, Dunlop from the bicycle bubble or Lucky Strike EC from the bowling era). But they do drive the price well above intrinsic value, and underestimate the effect of increasing competition on many of the emerging players. As a result, most of the hyped companies eventually disappear, leaving their investors/speculators penniless.
8. Pay attention to the balance
A strong balance sheet is essential to a company's financial health and determines how well it can withstand economic shocks. Companies with a lot of debt and low cash reserves are at higher risk of financial problems, especially when interest rates rise or profits come under pressure. During a company's (or an individual's) lifetime, this happens because of circumstances within or outside its control. A solid balance sheet means that a company has sufficient equity, generates stable cash flows and does not depend on finding additional financing to survive. Important factors to analyze are the debt-to-earnings ratio, the interest coverage ratio and the amount of cash and cash equivalents.
Too much debt can lead to forced sale of assets or bankruptcy, while a healthy balance sheet provides financial flexibility to invest and bridge crises. The examples are legion. Dexia and ING lost their asset management arm (now Candriam and NN). Umicore had to sell its mines. Vivendi had to divest utility branches after debt-financed acquisitions in the media sector. General Electric, once the best-known U.S. conglomerate, is a shadow of its former self.
Limited debt purchases support growth, but too much can seriously damage financial health.
9. Cash flow is more important than profits
Profits can be manipulated by accounting tricks, but cash flow does not lie. A company can appear profitable on paper when in reality it is struggling to pay the bills.
This is because the income statement is subject to depreciation, tax benefits and other items that do not directly affect liquidity. Cash flow, on the other hand, shows how much money actually comes in and is used in day-to-day operations.
Strong cash flow means that a company is able to repay debt, pay dividends, buy back its own shares, and invest without relying on external financing.
In contrast, companies with weak cash flow often have to issue new stock or take on debt to survive, to the detriment of shareholders. By focusing on cash flows rather than accounting profits, you avoid companies that are profitable on paper but financially shaky in reality.
A good example is Unibail-Rodamco-Westfield (URW), the French real estate giant. URW can show high paper profits due to accounting revaluations, while actual cash flows are pressured by rising borrowing costs, constant investments and vacancies
10. Learn from your mistakes and keep learning
Even Buffett makes mistakes, but he learns from them. He stresses the importance of continuous education and reflection: "The best thing you can do is constantly educate yourself." This means reading annual reports, financial books and studying both successful and failed investments. Buffett reads hundreds of pages daily and considers reading to be the most important factor in his success.
Conclusion
Warren Buffett's stock market laws are timeless and applicable to any investor, from beginner to expert. By applying these principles, you can significantly increase your chances of a successful investing career. Investing is not a sprint, but a marathon.
Authors: Petrick Step
Co-Authors: Wouter Verlinden, Jens Verbrugge
