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“We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.” Warren Buffett
The quote above is from a letter he sent to his shareholders in 2011, explaining that he was looking to make a big acquisition. Warren Buffett at the time had more than $34 billion in cash idly waiting for his next investment opportunity. This is not unusual for Warren Buffett, though. He is known to keep around $20 billion in cash, in order to buy great companies at good prices.
Companies Associated with Buffett
Some of these great companies that he owns 100% are well-known companies, such as Benjamin Moore, Business Wire, CORT Business Services, Dairy Queen, Duracell, Fruit of the Loom, GEICO, Helzberg Diamonds, The Pampered Chef, and See’s Candies. Other companies that he has major investments in are American Express, Kraft Heinz, Phillips 66, Wells Fargo, IBM, and Coca Cola. As you can see, Warren Buffett has a very eclectic portfolio. When he sees a good deal on a great company, he doesn’t hesitate to buy.
Beating the S&P500
In a previous article, I wrote about investing in the S&P 500 since mutual funds consistently underperform the market. Warren Buffett, on the other hand, eschewed this advice and bought his first company in 1964. Since he bought Berkshire Hathaway, he has returned 1,000,000%. Meanwhile, the S&P 500 has returned 2,300%. Can you believe that Warren Buffett has beaten the market by 997,700% or roughly 434 times? I can barely fathom that number. Needless to say, Warren Buffett is one of the greatest investors our generation has ever seen. So, should individual investors try to emulate Mr. Buffett and hoard up cash in order to buy when when the market has dropped?
Ups and Downs of the Market
Another great quote from Warren Buffet is, “Be fearful when others are greedy and greedy when others are fearful.” According to the Motley Fool, the market on average drops 10% every 11 months. Based on this number, on average, as an investor, you should be able to buy stocks on sale every year. If that’s the case, why do investors consistently buy high and sell low?
One of the reasons is: since we are human, we let emotions play into our investment-related actions. When the market is going well, there is a tendency to think the market will continue to do well for the foreseeable future. So, we buy more. When the market is going down, as an investor you never know where the bottom really is, so we get scared and try to get out while trying to preserve capital. There is an old adage– the market goes down like an elevator and goes up like an escalator.
The Best Investor is a Calm Investor
The common myth is that investors have to be super smart and great at math in order to excel at the stock market. Both of these characteristics are great to have, but more important is the investor’s temperament. Do you realize that research has shown that women are better investors than men? Gary Dayton says this is because “women tend to be calmer, possess a longer-term outlook, do more research on their investments and remain steady under pressure.”
Let’s say that you don’t have this temperament. What can you do as an investor to avoid some of the pitfalls from buying high and selling low? The easiest thing to do is set up a dollar-cost averaging account. This is a fancy way of saying buy a fixed-dollar amount each month, regardless if the market is up or down.
If the market is down one month, you will be able to buy more shares. If the market goes up the next month, you will buy less shares. Additionally, it reduces the risk that you will buy at the time top of market since you are contributing each month. Finally, this is a great way to remove the emotional rollercoaster of trying to determine the “right” time to buy into the market. It allows you to remove the paralysis of doing nothing and allows you to get into the market with incremental payments each month.
I think timing the market is a fool’s game and would rather do other things with my time. But, I realize that investors are always going to think that they have a unique edge in the market. My one question to them is, if Warren Buffet invests like a girl, why don’t you?