1 Warren Buffett Principle That Investors Should Adopt to Beat the Market

Here’s why investors should follow Warren Buffett’s teachings as volatility picks up. Deeply discounted stocks like Enbridge Inc. (TSX:ENB)(NYSE:ENB) arise from such volatile moves.

| More on:
The Motley Fool

It’s quite remarkable how fast market sentiment took a 360-degree turn in just over a month’s time to kick off 2018. There’s no question that the lack of volatility last year was like the calm before the storm. But to the surprise of many investors, the party just kept getting better as the S&P 500 Index went parabolic in January.

At the time, billionaire investor Ray Dalio even went so far to say that investors would “feel stupid” for holding cash and not going all-in on what seemed like a free lunch from the market melt-up. Warren Buffett was one of the investors who had been hoarding boatloads of cash around this time. In retrospect, it was a genius move, although it may have felt “stupid” in the moment.

Not feeling so stupid after all

Fast-forward a month later and the S&P 500 corrected twice as excessive exuberance over the implications of Trump’s tax cuts turned into panic as many feared Trump’s aggressive protectionist tone would be the start of a global trade war, spelling a potential end for the bull market. Perhaps the general public didn’t really know Trump’s intentions as well as they originally thought when they piled into stocks whose valuation was suspect?

For a new investor, it was hard not to be an aggressive buyer of stocks in January. It’s human nature to be greedy when times are good, after all. When the S&P 500 hit an inflection point amid one of the smartest investors of our time, Ray Dalio, issuing extremely bullish statements, I think the euphoria caused investors to forget Warren Buffett’s timeless advice: “Be fearful when others are greedy, be greedy when others are fearful.”

You’ve probably heard this famous Buffett quote ad nauseam along with a majority of do-it-yourself investors, but there’s a huge difference between acknowledging a piece of advice and adopting it as one of your own investment principles.

Adopting this principle is hard, as doing so goes against human psychology. Buffett’s teacher Benjamin Graham once said: “In the short run, the market is a voting machine, but in the long run, it’s a weighing machine.”

As we live in the moment, the day-to-day market fluctuations are primarily driven by the emotions of the masses. Like it or not, many of us are influenced by them despite a theoretical understanding of Buffett’s principles.

It’s difficult to not become frightened when markets are down +2% in a day or greedy if markets are up by that same amount. With the recent surge of volatility, many investors are probably experiencing gigantic mood swings on a day-to-day basis, which isn’t healthy for one’s portfolios. Emotional rollercoaster rides can cause you to follow the herd, leading you to buy at peaks and sell at troughs, losing huge amounts of capital in a very short duration of time.

Moreover, the only way to really have a contrarian mindset like Buffett is to live through the volatile times yourself and practise contrarian behaviour.

At the time of writing, markets appear to be in turmoil, so now is a great time to be a contrarian buyer of beaten-up stocks like Enbridge Inc. (TSX:ENB)(NYSE:ENB) as investors flood to the exits.

Bottom line

Investing like Buffett is difficult, as many of our investing decisions are influenced by our emotions, whether we’re aware of it or not.

Buffett was one of the few men who profited profoundly from the Great Recession. Come the next bear market or crash, he’s going to do it yet again. He’s hoarded cash of late and as markets weaken, he’ll finally have the opportunity to put it all to work.

Unlike Buffett, however, many of today’s investors, including professional money managers, haven’t experienced investing through a bear market or crash. As a new investor, it’s easy to look back on 2008 and tell yourself you would have bought at the bottom; however, actually doing so in the heat of the moment is difficult, especially if the financial media starts using the word depression after a +50% peak-to-trough decline.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in April 2024

For growth and dividends this April, look to these two REITs that have quite the promising present as well as…

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »