Icon investor Warren Buffett and owner of one of the largest investment companies, Berkshire Hathaway, said in a 2019 CNBC interview:
“We don’t buy the stock market, we buy companies”.
In this tiny tidbit of insight lies tremendous wisdom.
What Buffett is saying could be construed as: don’t buy the stock market because you think it will go up, but instead, buy good companies that will continue to grow and subsequently increase shareholder value.
There are many historical examples supporting Buffett’s strategy as a sound one. The most recent is the CoVid March 2020 market crash and its subsequent recovery.
The Dow fell a stunning 38% in the first three weeks of March 2020 due to the onset of CoVid, and when the stock avalanche finally stopped, parts of the market started to rebound in a surprise “V” shape rally.
When CoVid caused the governments of the world to initiate global shutdowns in response, it arguably shifted the buying patterns of civilized man forever.
Stocks of companies that catered to in-person services such as restaurants, retail stores, gymnasiums, and the like, saw their stock prices plummet, while those offering mail-order, online, remote, or other distancing-type of service options, witnessed their stock price start to rise from the proverbial ashes.
Extrapolating to Buffett’s comments about buying individual companies instead of broad-based market buying, had an investor just bought a broad-based index fund, that fund may have had stocks that cratered along with the shutdowns.
Investors that instead took care in buying only stocks carefully selected with the shutdown constraints in mind, may have bested the broad-based indexes and possibly by many multiples.
The term “stock picker’s paradise” comes to mind. This means that blindly and, in my opinion, mindlessly, buying a broad-based index mutual fund or exchange-traded fund (known today as the popular ETF) possibly exposes the investor to some stocks that might rise mixed along with some stocks that might get crushed.
The net effect might be a portfolio that goes nowhere while the evening news touts the stellar performance of a particular individual stock that sees customers flocking in droves to the online order desk.
Although many an investor and/or advisor might favor this typical shotgun approach to investing, there may be times when knowing a little bit more about investing than what is the most popular mutual fund of the day, will yield superior results.
Warren Buffett seems to think so, and his track record of successful investing is unparalleled.
With that in mind, the current market environment of 2022 may once again be setting up to teach the inattentive or unknowledgeable investor/advisor that knowing what stocks to buy in the market instead of just buying the market as a whole, may again prove that Buffett knows of what he speaks.
Although many might argue that the average advisor or investor just buys a bunch of mutual funds or ETFs that cover the broad-based market, there may have been times when doing just that yielded less than satisfactory results, and at times may have even hurt the portfolio.
It has been said the market is designed to take your money, not make your money, and that it is run by professionals. To think you can beat a bunch of Harvard-educated quants sitting in front of their computer screens all day long is foolhardy.
Education is the cornerstone of progress, so keep in mind the market professionals you’re up against and running the whole shebang have a lot of the educational part under their belt and by the best of schools.
Not to say an investor can’t make money in the stock market, but knowing a little bit about stock picking than looking up the flavor-of-the-day mutual fund might go a long way in better securing your hard-earned savings.
This article is opinion only of Marc Cuniberti, and may not represent those of this news media and should not be construed as investment advice nor represents the opinion of any bank, investment or advisory firm. Neither Money Management Radio (“Money Matters”) nor Bay Area Process receive, control, access or monitor client funds, accounts, or portfolios. Contact: (530)559-1214 or marc@moneymanagementradio. Marc was recently voted in the “Union’s Best of Nevada County” “Best Financial Advisor of 2021” by popular vote.