1. Fight against the ravages of inflation
“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 colourful image back in his 1981 annual letter to shareholders. The billionaire investor described high inflation as a “tax on capital” that dissuades corporate investment.
With inflation at a worrisome 7% in the U.S. and nearly 5% in Canada, levels not seen in decades, investors might want to think about assets that are immune (or at least not as vulnerable) to the ravages of rising costs.
One example other billionaires like Bill Gates have taken to recently is investing in farmland. Agriculture offers steady, reliable returns — whatever the state of the economy, people still need to eat.
Other 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 Bank of America, equity funds took in more than US$1 trillion in cash in 2021, exceeding the combined total from the past two decades.
Whether you’re new to investing or you’ve been at it for ages, going against the grain is often the prudent thing to do.
As we’ve seen with the meme stock fiascos of last year, blindly following the crowd often leads to disastrous results. Instead of focusing on what’s popular, try to prioritize safety and stability.
For example, three solid blue-chip stocks that have performed poorly over the past several months include The Walt Disney Company, Verizon and Intel.
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 an interview last year with CNBC, Buffett reflected on his biggest takeaway from the pandemic: how ill-prepared society is to handle emergencies that it knows will happen sooner or later.
COVID, he points out, had an “extremely uneven” impact on different members of society. While we will certainly be faced with another crisis in the future, it’s difficult to know exactly what that challenge will be.
As an investor, the simplest way to prepare for anything is through proper diversification. Spread your bets out as widely as possible.
Buffett is famously a fan of index funds and has previously 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 no one knows with 100% certainty when, and for how long, those moves will come.
Invest long enough and you’ll find that there will be weeks, months, or even years that your portfolio produces nothing but losses. The start of 2022 is a good example of that.
But as Buffett explains in the above quote, those periods of decline offer tremendous opportunities to buy high-quality stocks at cheap prices. Investors who purchased stocks during the height of the COVID pandemic have profited handsomely. And, unfortunately, those who sold out to move their money to the sidelines are likely regretting their decision.
If you understand that volatility is the rule (and not the exception), prolonged dips and swings can actually work to your advantage.
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 openly avoid investing in anything he doesn’t understand, but he’s also wary of a currency that his business partner Charlie Munger criticized as being “so useful to kidnappers and extortionists.”
While he said he would never buy Bitcoin, he famously refused to invest in Apple once upon a time — and now it’s one of Berkshire Hathaway's largest stock holdings.
If you’re set on buying into Bitcoin, be sure to invest only what you can afford to lose. After all, the price of Bitcoin is down roughly 50% from its all-time highs.
As Buffett told CNBC in 2018, remember that it’s not magic — so temper your expectations for returns.
6. Focus on quality and value
“Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Sure, frugality runs in Buffett’s blood. With a net worth of US$100 billion, one of his favorite restaurants is still McDonald’s and he has a card that grants him free breakfast at the fast-food chain — something he reportedly cashes in on often.
And who doesn’t love a good deal?
When it comes to stocks, Buffett is just as adamant about finding good bargains — especially of high-quality companies.
Even with a US$140 billion war chest of cash, 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. A couple of Buffett's famous investments include buying Bank of America during the height of 2008 mortgage crisis and Coca-Cola back in 1988 at a time of struggle.
Create a watchlist of stable companies with reputable brands that you'd love invest in, and then wait for the chance to snap them up at discounted prices.
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.”
No one spits out a fun turn of phrase like the Nebraska native.
But underneath the quip, Buffett has an important message to share: 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 in order to predict what the market will do next.
But instead of worrying about short-term gains, think long-term.
Where to go from here
You don’t have to have to be a billionaire like Buffett to make these investment lessons work for you. And you don't have to limit yourself to the stock market.
Many wealthy people invest in fine art, which has proven to be a good hedge against stock markets. Art is known to have virtually no correlation with stock prices, and thanks to a new trading platform, investing in blue-chip art is now available to investors at almost any price point.
Fine art as an investment
Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the market’s ups and downs.
That’s why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.
Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.
And it’s becoming a popular way to diversify because it’s a real physical asset with little correlation to the stock market.
On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.
Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade — due largely to the asset’s track record as an inflation hedge.
Investing in art by the likes of Banksy and Andy Warhol used to be an option only for the ultrarich. But with a new investing platform, you can invest in iconic artworks just like Jeff Bezos and Bill Gates do.