The Motley Fool

Warren Buffett: Short-Sellers Beware

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When you have a career as long as Warren Buffett’s, you can safely say, “I’ve seen everything there is to see in this business.” But Buffett is unlikely to say something like this because, as an avid reader and learner, he probably knows that there is always new knowledge to be found.

There is a difference between seeing everything (or a lot of things) and experimenting with everything. Warren Buffett probably knows about almost all the famous investment strategies and approaches, but he prefers to stick to value investing because given enough time, the probability of succeeding by holding good companies is higher than some other investment approaches.

That doesn’t mean Buffett has never employed other approaches as well.

Buffett and short selling

With all the Reddit and GameStop going around, short-selling has become a hot topic. Many investors aren’t aware of the fact that Warren Buffett used to short stocks, and shocker, his experience with this particular investment tactic hasn’t left a good taste in his mouth.

He admits that short-selling might seem very tempting because, as an investor, you see significantly more overvalued stock than the stocks that are dramatically undervalued. But when you are betting on the dip and “borrowing” stocks for a short-sell, you might lose significantly more than you bet if the market goes the other way.

Buffett says it’s a very tough business, partly because people who hold significantly overvalued stocks are “on some scale between promoter and crook,” which essentially means they might have more “sway” over the market movement (or at least perception) compared to retail investors.

Stick to safe tactics

If you want to take Buffett’s advice and stick to stocks that might offer decent long-term return potential, one company that should be on your radar is Brookfield Infrastructure Partners (TSX:BIP.UN)(NYSE:BIP). It’s one of the largest “infrastructure” companies globally and focuses on the transport and storage of energy, water, freight, people, and data.

It has a nice circularity to it since energy (especially oil) was the most desirable and essential commodity for the past few decades. Data has surpassed oil to become the most valuable commodity of the century. But that’s what (probably) influences the future security of the company.

If we take a look at the stock’s history, one number that pops out is the robust 10-year compound annual growth rate (CAGR) of 23.8%. If the company can keep growing at this rate for even a couple of decades more, it might help you build quite a significant nest egg for your future.

Foolish takeaway

Warren Buffett knows a lot about investment, and whether or not he is entirely right about short-selling, one major take away from his warning that you should focus on is that it’s tough. Short-selling is difficult and a risky bet even for people who understand the market quite extensively. But it’s even more dangerous and risky for retail investors, and they might fare better if they stick to finding and holding good, undervalued companies.

Speaking Warren Buffett’s warning to short-sellers...

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Fool contributor Adam Othman has no position in any of the stocks mentioned. David Gardner owns shares of GameStop. The Motley Fool recommends BROOKFIELD INFRA PARTNERS LP UNITS and Brookfield Infrastructure Partners.

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