Here are a pair of seemingly random investment news headlines. See if you can spot the connection.
Warren Buffett, the iconic billionaire investor, has invested nearly $1 billion into the oil business since the start of 2016.
Meanwhile, oil market experts are warning that 99-cent gasoline is a real possibility.
Do you see the clear trend here? Buffett is all about deep value, buying up assets when they are very cheap. He loves a stock with a wide “moat,” that is, with few brand competitors (think Coke) but clearly he doesn’t mind buying a commodity if the price is low enough.
Buffett is not buying oil itself. Instead, he is buying up millions of shares of Phillips 66, an oil refiner. The company’s stock has taken about the same hit as the overall stock market, yet oil refining can be profitable regardless of the oil price.
Falling prices often mean higher demand, after all. Cheap gas (whether we get to sub-$1 gasoline or not) leads people to fly more, take driving trips and, somewhat unfortunately, buy large trucks and SUVs.
The stock market as a whole is very good at pricing value. If most investors fear stocks and get out, however, some folks with cash and a taste for risk are going to pick over the discard pile and find value to buy.
Am I suggesting that you buy Phillips 66 stock? Heck no! Should you play the stock market by trying to cherry-pick value stocks, as Buffett would? Even less so.
What I am suggesting is that there is an inherent strategy behind buying stocks that have fallen in price but not in value. It’s a strategy that ordinary retirement investors can use to their advantage without having Buffett-level cash to invest and without reading a single corporate annual report.
“Buy what’s ugly” is a great mantra, but that requires a lot of attention and time. You have to be able to correctly price the shares of hundreds of companies, first of all. You have to buy them at moments of extreme value. And you have to be right much more often than you are wrong.
Traders tend to be wrong a lot, so many of them try to rig the game by using leverage — other people’s money — to win bigger when they feel that they are absolutely right. Sometimes it works, sometimes it blows up in their faces.
It all adds up to stress and risk. The serious retirement investor instead owns whole markets and puts money into a variety of investments, including foreign stocks and bonds, real estate and small-cap U.S. stocks.
Buy low, sell high
As the trader world runs from market to market, there will be distortions, moments when markets go “on sale,” to borrow Buffett’s favorite phrase. Periodic rebalancing captures those gains automatically. Using index funds keeps the cost down and lowers the risk of concentrated bets.
Should you try to think like Buffett? Unless you have his track record and expertise, no, you should not. Should you buy whole markets on the cheap while rebalancing with discipline? Absolutely yes.
Buffett himself has said that index funds are the answer for most people, and he’s right. Low cost disciplined investing will get you the results you need for retirement, if you stick with it.
Buy low, sell high. It really doesn’t get any simpler than that. A balanced, low-cost retirement investment portfolio achieves that and more.