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Buffett's Wisdom on Long-Term Investing

Buffett's Wisdom on Long-Term Investing
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Wednesday, 12 December 2018 04:02 PM Current | Bio | Archive

With the recent volatility in the markets, investors might be tempted to trade in and out of their stock positions.

But the truth is, the strongest returns in the market are earned over long periods of time. The financial shows on television might be obsessed with the daily moves in the stock market, but investors shouldn’t be.

Markets are very difficult to predict with any accuracy. To be a successful capitalizing on short-term fluctuations in the market, a trader needs to be right twice—on when to buy, and when to sell.

Getting these exactly right is virtually impossible. Instead, investors should follow the buy-and-hold strategies employed by Warren Buffett, arguably the most successful investor of all time. There are many great Warren Buffett quotes that articulate the benefits of long-term investing.

Trading Can Be Hazardous To Your Wealth

Brokerage firms and the financial media often advise investors to act on the many short-term moves in the stock market. Be it a monthly jobs number, GDP report, or some geopolitical event, they will usually advise investors to take action in some way. This is because they have a vested interested in an investor doing something—anything—that makes money for them. Frequent trading in and out of stocks generates trading fees, and in some cases, taxes. These are costs that reduce your rate of return, and can really add up over long periods of time.

Rather than making a broker rich, investors can enrich themselves by following Warren Buffett’s advice. Two specific quotes from the Oracle of Omaha demonstrate why investors should resist the urge to act on day-to-day fluctuations in the market, and instead should focus on the long-term.

“Nobody buys a farm based on whether they think it’s going to rain next year. They buy it because they think it’s a good investment over 10 or 20 years.”
– Warren Buffett

In this first quote, Buffett makes the case for changing how we view the stock market. The focus on flipping stocks for short-term gains can make it seem like the stock market is a casino, where traders are simply placing bets on outcomes. But it is important to remember that the stock market is not gambling. Far from it—by buying shares of a company, you are a part-owner in that business. As such, an investor is entitled to all residual profits and dividends that the company generates. Buying and holding stocks for the long-term unleashes the magic of compounding.

Let’s use Wells Fargo (WFC), one of Buffett’s largest stock holdings, as an example of what compounding can do for long-term investors. Exactly 20 years ago, Wells Fargo shares closed at a price of $18.13 per share. With a current share price of $48.80 per share, this means Wells Fargo’s stock price returned 5.1% annually. That is a decent rate of return, but it’s even more impressive after accounting for dividends. Had the investor used each dividend payment to buy more shares of Wells Fargo over the course of 20 years, investors would have a cost basis of just $8.67 per share, resulting in annual returns of 9.0%.

How To Decide Which Stocks To Buy

There are a number of important qualities investors should consider before buying a stock. For long-term investors to be successful, it is critical to buy shares of companies that have strong brands, profitable business models, and durable competitive advantages. Short-term considerations, such as which stock might be higher in a few weeks or months from now, should not be part of the decision-making process.

An easy way to visualize this would be to consider the following Buffett quote:

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for ten years.”
– Warren Buffett

This quote can be very helpful for investors. Buffett is essentially recommending investors only buy companies they would be comfortable holding for the next decade. This immediately puts investors in the right mindset. Don’t buy a stock unless you are willing to hold onto it for 10 years, or longer.

Final Thoughts

Warren Buffett has taught the world a great deal about investing. He is one of the biggest proponents of buy-and-hold investing. While the rest of us will likely not accrue the same kind of wealth that Buffett has, we can all build a brighter financial future by following his advice.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
Warren Buffett has taught the world a great deal about investing. He is one of the biggest proponents of buy-and-hold investing. While the rest of us will likely not accrue the same kind of wealth that Buffett has, we can all build a brighter financial future by following his advice.
buffett, wisdom, long term, investing
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2018-02-12
Wednesday, 12 December 2018 04:02 PM
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