You’ve probably seen the many glib online articles which purport to explain how billionaire investor Warren Buffett became one of the world’s richest men.
You know, “three stocks Buffett loves” and so on.
It’s not that simple and you know it. While Buffett’s methods are public knowledge, adopting his approach to investing is no walk in the park. Otherwise, we’d all be billionaires, right?
But there is one bit of wisdom you can glean from him. The big takeaway: “Buy low, sell high.”
Specifically, Buffett recently shared that he was buying IBM during the recent downturn in the U.S. stock market.
A normal investor looks at that and thinks, “IBM? That old war horse? Why not Tesla or Netflix or something more exciting!”
Buffett does not want excitement. He wants long-term growth. Like a master chess player, he thinks moves ahead. In the case of IBM, up to a decade of moves ahead. “We’re buying because we like what we’re buying in relation to its long-term prospects,” Buffett said.
And that’s the tricky part about what Buffett does so well. He can peer into a company’s books and see value where others don’t. IBM stock has fallen on hard times, down by double digits, but that alone doesn’t make it a buy.
Buffett has it figured that the tech blue chip has a lot of growth ahead after all. The recent downturn simply put the shares on sale, allowing him to layer in deeper and own more.
Can ordinary people think in 10-year return spans? Probably not. But you can find a way to buy low and sell high without having to pick stocks at all.
That’s what rebalancing is, in the end. It’s letting the market inform you of when any given investment has been over- or undervalued by the mass of your fellow investors.
Not by looking at the fundamentals of individual stocks, nor by creating complicated technical charts. Just by owning a broadly diversified portfolio of multiple asset classes.
If your risk tolerance suggests a 50% exposure to U.S. stocks (just as an example) and you currently own that through an index fund, do nothing.
If investors bid up U.S. stocks, your holding over six months might become, say, 62% of your personal portfolio. It’s time to sell. Get back to 50% and let it go for another six months.
Stock downturn strategy
You have sold high. Redistribute the cash to other parts of your portfolio — bonds, foreign equities, real estate, etc. — and wait.
And some point, sooner than later, investors will sell off, as they did over the past month or so. Some of the selling made sense, of course, but the stock market is not logical nor measured in its reactions to news events or even the simple fact that other investors are selling.
Imagine the selling gets heated. Your U.S. stock portion is now at 45% of your holdings. Time to buy low! Sell a portion of your other holdings to generate cash or use incoming dividend payments and interest (Buffett’s strategy) to buy back in to 50%.
You don’t need to be a Buffett-level stock picker to get ahead in the stock market. You just need a solid, repeatable, low-cost plan.