A simple lesson from Warren Buffett that even children can learn

Warren Buffett is widely considered to be one of the greatest investors of all time, and his record speaks for itself.

Shares in Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), the corporation the investor has managed since 1965, have achieved an average compound annual gain of 20.1% over the past 56 years, nearly double the return of the US-focused S&P 500 index.

Buffett is also a relative rarity in the investment world in that he is a household name (especially in the US) thanks in part to his folksy manner and open-book style of investing.

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Every year thousands of shareholders attend Berkshire’s annual meeting (AGM) where Buffett and his right-hand man, Charlie Munger, spend hours carefully answering audience questions on everything from politics to business, investing, corporate governance and the environment.

While the event is aimed primarily at Berkshire’s shareholders, considering Buffett’s experience and record there’s always something investors can learn from this highly successful individual.

There’s a difference between the stockmarket and the underlying business

If I had to pick out just one lesson from this year’s AGM, I’d have to pick Buffett’s comments on market timing.

Responding to an audience question, he said, “I don’t think we’ve ever made a decision where either one of us has either said or been thinking we should buy or sell based on what the market is going to do, or for that matter, on what the economy’s going to do. We don’t know.”

Timing the market is usually a fool’s errand; most research shows it’s almost impossible to do and any investor who’s been around for a few years will know that all too well.

When investing for the long term, it’s not whether you buy a stock at 100p or 110p that makes the difference, it’s how long you hold that stock for and how much value the business creates in the meantime (this applies to funds as well).

Over the past 70 years, (Buffett first started investing money for others in the mid-1950s) Buffett has seen recessions, depressions, wars, periods of inflation, central bank tightening cycles, monetary easing cycles, market crashes, market bubbles and civil unrest.

You name it, he’s been through it. Yet he’s never moved away from his basic strategy of buying high-quality companies when they look cheap, and avoiding them when they look expensive.

Since the beginning of his career Buffett has invested following the principle that a share is a piece of a business, not a gambling chip in a casino. He looks through the market and focuses on a company’s fundamentals to determine how much the underlying business is worth. He’s not bothered by what the rest of the market is doing.

The simple principle at the core of Buffett’s strategy

It might seem simple, but this differentiator lies at the heart of Buffett’s strategy: he buys businesses, not stocks. He is looking to buy businesses on the cheap when the market offers him the chance. He is not trying to outsmart the market and predict the future.

This is a strategy any investor can follow. In fact, Buffett believes it’s something even children can pick up.

“We’ve been reasonably good at figuring out when we were getting enough for our money. And we had no idea when we bought anything, but we always hoped it would be down for a while so we could buy more. ... I mean, that stuff, you could learn in fourth grade,” he told his audience last weekend.

The approach has cost him some opportunities, but it has also saved Buffett from making plenty of mistakes, and that’s far more important.

It’s very easy to lose money. It’s far harder to make it, a fact Buffett knows all too well. So rather than trying to guess what the future holds for the market, he sticks to what he knows – buying businesses at attractive prices.

Considering his record, it’s hard to argue against this approach.

Disclosure: Rupert Hargreaves owns shares in Berkshire Hathaway.