1. Beware of inflation (it’s heating up)
“Inflation acts as a gigantic corporate tapeworm. That tapeworm preemptively consumes its requisite daily diet of investment dollars regardless of the health of the host organism. Regardless of a company's profits, it has to spend more on receivables, inventory, and fixed assets to simply equal the unit volume of the previous year.”
Buffett offered this colorful image in his 1981 annual letter to shareholders and described high inflation as a “tax on capital” that dissuades corporate investment.
With inflation hitting highs not seen in close to 15 years, investors might want to consider assets that are immune (or at least less vulnerable) to the ravages of rising costs. Assets that have historically done well during periods of high inflation include gold and real estate.
2. Don’t follow the herd
“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.”
According to an April Bank of America report, a whopping US$576 billion went into stock-based funds from November 2020 to March 2021 — trouncing the combined US$452 billion inflows seen in the 12 years prior.
Whether you’re a new or experienced investor, going against the grain is often the prudent thing to do. As we’ve seen with recent meme stock fiascos, following the crowd often yields disastrous results. Instead of focusing on what’s popular, try to prioritize safety and stability.
If you’re not confident about picking investments, consider using an investing app that, with some guidance based on your risk tolerance and return objectives, will help you build a diversified portfolio to match your needs.
3. Prepare your portfolio for anything
“[T]he biggest thing you learn is that the pandemic was bound to occur, and this isn’t the worst one that’s imaginable at all. Society has a terrible time preparing for things that are remote but are possible and will occur sooner or later.”
In a CNBC interview earlier this summer, Buffett reflected on his biggest takeaway from the pandemic: how ill-prepared society is to handle emergencies it knows will happen sooner or later.
He points out COVID's had an “extremely uneven” impact on different levels of society. As an investor, the simplest way to prepare for anything is through proper diversification. Spread your bets out as widely as possible.
Buffett's famously a fan of index funds and has said the best thing most investors can do is put their money in an S&P 500 index fund.
4. Volatility is part of the game
“The true investor welcomes volatility … a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.”
Investing is a roller-coaster ride. Ups and downs are built into the experience, and nobody knows with 100% certainty when those moves will come.
But, as Buffett's quote explains, those declines offer opportunities to buy high-quality stocks at cheap prices. Investors who purchased stocks during the height of the COVID pandemic have profited handsomely. And those who sold to move their cash to the sidelines are likely regretting their decision.
5. If you want to buy Bitcoin, proceed with caution
“If you don’t understand it, you get much more excited than if you understand it. You can have anything you want to imagine if you just look at something and say, ‘that’s magic.’”
Buffett has never been shy about his disdain for cryptocurrency. Not only does he avoid investing in anything he doesn’t understand, he’s also wary of a currency that his business partner Charlie Munger called, “so useful to kidnappers and extortionists.”
While he said he would never buy Bitcoin, he once famously refused to invest in Apple — and now it’s one of Berkshire Hathaway's largest stock holdings.
If you’re set on buying into Bitcoin, invest only what you can afford to lose. And temper your expectations for returns. From there, you’ll want to use an app that allows you to invest for free and makes buying crypto as easy as possible.
6. Focus on quality and value
“Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Frugality is in Buffett’s blood. Despite a net worth of US$100 billion, one of his favorite restaurants is McDonald’s and he has a card that grants him free breakfast at the fast-food chain — something he reportedly uses often.
When it comes to stocks, Buffett is just as adamant about finding good bargains — especially of high-quality companies. Buffett is never in a hurry to invest Berkshire Hathaway's capital. Instead, he remains patient and only invests in good companies when they're available on the cheap.
Create a watchlist of stable companies with reputable brands that you'd love to invest in, and then wait for the chance to snap them up at a discount.
7. Think long-term — even if you have very little to invest
“No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant.”
Underneath the quip, Buffett shares an important message: In investing, there’s no tool as powerful as time. Studies have shown that investors are becoming increasingly impatient, zigzagging in and out of stocks and hoping to predict what the market will do next.
Instead of worrying about short-term gains, think long term. The most proven way to build stock-market wealth is to buy high-quality companies at good prices — and then hold them for the long haul.
You don’t have to be a billionaire to make this strategy work for you. Some apps allow you to invest with just your “spare change.”