Editor’s note: The headline of this story has been updated to correct the spelling of Warren Buffett’s name.
Billionaire investor and investment guru Warren Buffett once shared the thumb rule he uses when to give up on a stock and in the process explained why investors are better off than business tycoons such as Andrew Carnegie or John Rockefeller.
What Happened: “I love it when the things we buy go down,” said Buffett in a 2014 Fortune Magazine interview. He said he would get “euphoric when the stocks are down because he can buy more of something he owned. On the other hand, with their stocks, people think the stock knows more than they do, he said.
“When the stock goes down, they say the stock is telling them something… and what it’s telling me is I can get more for my money,” the Berkshire Hathaway CEO said. But they take it as a kind of referendum on themselves and make it as a “me versus stock” and say if they get back what they paid, they are going to sell the stock irrespective of what they paid, he said.
“Stock doesn’t care what you paid; you have to remember the stock doesn’t even care that you own it; you are nothing to the stock; that stock is everything to you,” Buffett said.
The only question with every stock, every day is to look into “Can I get more for my money someplace else,” he said, adding that investors get a chance to be in thousands and thousands of great businesses and their prices change all the time and so do their relative valuation.
See Also: Best Value Stocks
Since an investor can make the exchange at a very low cost these days, either with low commissions or nothing, they can always shift from one business to another, Buffett said. Investors have an advantage over Carnegie, who was in the steel business or Rockefeller who was in the oil business, he said. The billionaire said these businessmen couldn’t immediately shift to something like retailing or rearrange their business empire as an investor can with the portfolio they owned. The portfolio can be rearranged at a moment’s notice with practically no cost, he said, adding that this is a huge advantage.
“There is nothing about the price action of the stock that tells you whether you should keep owning; what tells you whether you should keep owning it is what you expect the company to do in the future versus the price at which it’s selling now compared to the other opportunities of businesses you think you know equally well and make that same comparison and that’s all there is to owning stocks,” Buffett said.
Why It’s Important: Buffett swears by an investment philosophy called value investing, which advocates picking stocks that appear to be trading for less than their intrinsic or book value. He has been very successful with the strategy and the success of Berkshire is a testament to it. The company, which owns holding companies primarily in the insurance and transportation businesses, as well as portfolio stocks, is now the eighth most valued global corporation, standing head-on-head with tech stocks.
Amid the current economic uncertainty, Buffett has shown a preference for accumulating a huge cash pile. At the end of the second quarter, the company had a massive cash pile of $277 billion.
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