What Would Buffett Do?

Posted by Wayne on September 14, 2008 – 11:49 am

There have been many times throughout my investing career when I’ve second guessed myself. There have been times, especially when the market has gone against me for a while, when I have had some self doubt.

I’m sure you can relate - especially after the last few weeks.

But don’t feel bad about it, getting a little worried in tough times is pretty much par for the course.

The Dow and the Nasdaq have both taken a hit, and foreign equity markets aren’t doing much better.

I’m sure you’ve seen many of your profits go up in smoke - or even worse, many of your positions are now showing significant losses.

Sometimes I’m sure it almost makes you sick to your stomach.

We’ve all been there.

What helps get me through tough times like that and stick to my guns is to sit back and ask myself, “What Would Buffett Do?”

Warren Buffett is a man who operates a company that has generated more revenue per employee than any company on the face of the earth.

But yet, the company doesn’t produce a single product. Heck, “Corporate Headquarters” only has about 13 people in it!

Basically, Berkshire uses Buffett’s brain to generate massive amounts of wealth - all through investing in the stock market.

Would Buffett Get Nervous Now?

Now that the market has been going down the tubes since January, do you think Warren Buffett is starting to sweat? Do you think he sits up at night panicking about the stocks he owns?

Definitely not!

This is a man who has been investing for over 50 years. He’s been through countless Bull and Bear market cycles … do you really think a soft market makes this man lose sleep?

I can promise you it doesn’t.

So the real question is, “WHY doesn’t he get nervous? Is it because he’s been doing this for so long? Is it because he knows this is only a temporary ‘blip’ on the radar?”

Well, that’s only part of it.

The main reason Buffett isn’t sweating bullets now is that he only buys certain types of stocks. He only buys stock in companies that have certain characteristics. We’ll call them the “won’t keep you up at night characteristics.” The man only buys stock in companies that:

1. Have businesses that are simple and understandable
2. Have little to no debt
3. Have a strong brand name
4. Are leaders in their industry
5. And throw off a lot of free cash flow

Companies that have these characteristics run very little risk of going out of business, running into any regulatory issues, or having a new competitor come along and steal the market away from them.

The biggest point to take away from this is that Buffett goes out of his way to avoid investments that require him to jump over “9-foot hurdles.” He waits for opportunities where he can walk over “1 foot hurdles.”

Now what if you had a portfolio full of businesses like this?

Regardless of which way the stocks were going, you would know, in your gut, that you still owned a piece of a great company.

It’s at times like this when you can truly appreciate this approach to investing.

So What Would Buffett Do?

Well, I’ll tell you what he wouldn’t do.

He would not be nervous.

He would not lose sleep.

And he certainly wouldn’t be taking any unnecessary risks.

That means stay away from any speculative plays. There’s no need to take extra risk at times like these - regardless of your risk tolerance.

You need to find companies that are leaders in their markets, have strong financial characteristics, and are trading near their lows.

Buying companies like that will allow you to sleep at night. It’s like having an airbag in your car when it crashes.

Even if this market goes lower, holding onto stocks like these will put you in a great position when the market turns positive again. The strongest companies are always the first to turn.

Remember: In the short term, the stock market is a voting machine - over the long term, it’s a weighing machine. The stronger companies will ALWAYS outweigh the weaker ones.

Stay cool and stick to the game plan and the market will take care of itself.

Until next time …