What is investing and what is not investing
“We believe that according the name investors to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic.”
Perhaps to some older generations, investing = gambling for them. That’s what you learn from in Hollywood anyway, looking at bickering screens of stock prices and talking to some people on phones at the same time. It is a mistake and a tragedy to assume that investing in stocks or any other things is equated to gambling, especially from both dramas and movies, when stories of people ended up bankrupt by playing with stock market are being told over and over again. But one can only become bankrupt from “investing in stocks” by involving in contra-trading and not using cash to invest.
We are told by mutual funds and unit trusts companies to buy and hold for long term when it seems that the fund managers are involved in trading madness. A common strategy to them is momentum investing – buy and sell shares when it is rapidly rising and falling in prices. Whenever there are changes in interest rates, quarterly earnings and prices, they started to buy and sell. All this is for the purpose of being the fund with the highest returns for that year so that public invests their money with them.
“We do not have, never have had, and never will have an opinion about where the stock market, interest rates, or business activity will be a year from now.”
Investing in stocks is like buying partial ownership in a business and watching it grows in revenue, earnings and profit margins over the years. Definitely not guessing direction of stock’s price based on some variables.
Then how Warren is able to make billions without any indications of stock market and interest rates direction?
The reason is simply because everyone is interested in what the price of the stocks at most one year from now, where interest rates is going to be within the year and how it is going to affect stock prices. When most people sell great businesses with great economics at a low price due to momentum investing, Federal Reserve raising interest rates etc., Buffett is waiting to buy them.
Buffett instead focus on the long term economics of the business underlying the stock, whether it has substantial competitive advantage and most importantly, whether they are undervalued. Stay with this thinking long enough, one day, you may acquire a portfolio of outstanding companies that will make you far richer than shifting in and out of stocks.
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Investing= good mutual funds and index funds
Gambling= penny stocks, naked options, single stocks as a significant portion of a portfolio.