Warren Buffett’s Investing Advice To Survive Market Volatility
The Harsh Truth
Oracle Of Omaha
“Diversification is protection against ignorance”
That little sub-title/quote you’ve just read is a direct quote from the man, the myth, the “Oracle of Omaha” himself…
I wanted so badly to make a joke or slightly inappropriate comment towards the end of that first paragraph. How could I though?
Have you seen or read some of the interviews that the man has done? he is probably the most humble, down-to-earth, billionaire the stock market has ever churned out.
I mean shit, fast forward to today, and look at the market billionaires. Need I say more or list names?
Perhaps some of you don’t believe that this humble, sound advice-giving old man, who reads for 85% of his workday and refuses to use computers or the iPhone and still charts out companies the old-fashioned way could say suck a thing.
Here’s your proof so that we may move forward with the story and why he is 100% right, and 110% wrong at the same time.
https://www.investopedia.com/ask/answers/031115/what-did-warren-buffett-mean-when-he-said-diversification-protection-against-ignorance-it-makes.asp
So What Does This Mean For The Average Person
Shocking, I know, considering that for my whole life, up until about a year ago, I thought of Warren Buffett as one of the biggest advocates for diversification,(if not THE biggest) in the world! Then I heard about him mentioning that a diversified portfolio will never make you rich and that it’s simply a form of protection for the ignorant against losing their money.
Preposterous! It couldn’t be…Could it?
I mean, didn’t legendary investor Bernard Baruch himself say this:
“It is unwise to spread one’s funds over too many different securities,” said Bernard Baruch. “Time and energy are required to keep abreast of the forces that may change the value of a security. While one can know all there is to know about a few issues, one cannot possibly know all one needs to know about a great many issues.”
Now, to be fair, he does go on to explain that this statement goes for MOST people, not all. Not the ones who rigorously educate themselves about the industries they invest in and the financial assets they are trading. Many people hop right into the stock market, and within three weeks they are literally acting like a Day Trader. It’s truly incredible if you really stop to think about it for a minute.
Would you ever in a normal state of mind think it a viable option to come home from your shift at the local Pyrex factory and saying to your spouse, “You know what? I’m going to head over to Cape Canaveral tomorrow and become an Astronaut. I was thinking about it the other day after I watched this YouTube video about how to become an Astronaut in less than 6 months, and it’d all hype. It’s not as hard as people make it out to be.” She’d probably phone the police to have you held on a 51–50 for finally going over the deep end.
Yet, legions of young (and old) Americans wake up each morning, read an article or two, see an inspirational YouTube video, and suddenly think they can become a full-time stockbroker that very afternoon.
From their apartment using the mediocre HP Chromebook, they got from Walmart for $200. Why is this? I don't see people acting this way towards professions such as becoming a doctor, or an x-ray tech, or a Google software engineer. Yet when it comes to the stock market for some strange reason people tend to believe that with a little luck, mixed with just figuring out a few tricks to find the patterns in the charts and learning some basic trading lingo that they can be just as good as the guys and gals that went to Wharton School of Business for 4 years, or the Law Student who ended up getting her masters in Finance instead from Harvard.
Why Is This Happening All of A Sudden?
It’s my belief that this stems from the dozens and dozens of unverified claims of success that you see in these social media posts, blog articles, and YouTube videos. I saw one about trading Options contracts, with some dude on a private jet, with stacks of cash and a gold serving platter being set down next to his MacBook telling me that it only takes one trade per week. One well thought out, and perfectly executed trade per week and you could see 100%, or even 500% returns!
In the end, of course, he makes it even easier, claiming that if I only sign up for his course, a $1,000 value, but now offering it to me for only $299, that I could have these trades sent to my inbox every Monday. By him personally! I was typing in my credit card information without realizing what I was doing until my girlfriend came over to see what had my attention so utterly that I hadn’t heard her ordering me to take out the trash, and she slapped me in the side of the head and asked if I was brain dead…Thus the legions are hooked.
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The next video is about Day Trading penny stocks using this simple method, (that they’ll teach you of course for a nice premium), of using the MACD and RSI to find the perfect setups, every day pre-market, and score big on the Parabolic Gappers!
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Look, I’m not bashing all of the YouTube teachers. I actually have watched quite a few myself to see what the hype was about and if they knew what the hell they were even doing. Some are actually pretty knowledgeable, and realistic. Perhaps they even go as far as to explain that this is not a hobby to be picked up in 2 months so you can quit your day job and trade from a Yacht sailing around the world as long as you have a good internet connection and a laptop. It’s the ones who do a little research, and learn a few terms and perhaps even have a basic understanding of the market. They throw around those big words like Parabolic Charts with potential Black Swan Gappers!
I don’t blame people, and I am not by any means calling people who fall for their scams stupid. These people are actors, just not on the silver screen. One thing that I could never get over, and what gave most of them away to me at least was the fact that if they made as much as they claimed from their trading abilities, then why spend hours upon hours filming and editing YouTube videos? Why go through the trouble-making an extensive, by extensive I just mean LONG and drawn out, 8 weeks course? Surely those hours would be more profitable trading the strategies and making the 100% gains they are trying to teach me.
It’s simple, they make their income from YouTube.
To become a successful investor, as in one who makes his/her entire living from the stock market in one form or another, whether it be advising, a hedge fund manager, stock analyst, stockbroker, market maker, etc. takes years of work and education. Yes, some find success relatively fast, and many,(including myself), never got a formal education and I do quite well in my trading. I am even fortunate enough to fully support myself that way, and it is my full-time job.
Back To Buffett And Some Other Hackable Topics
Warren Buffet was, and still is, one of the greatest investors of all time that this country has ever produced; and he did it legally! At least to my knowledge he did, and if he didn’t… well then I guess he’s even better than we thought because most of the wall street mongrels that defraud the general American public end up doing hard prison time. And I mean a HARD TIME.
Look at the infamous Jordan Belfort. I mean for god’s sake the man got like 16 months in prison! For defrauding the public for tens of millions of dollars, and multiple securities and exchange violations. Insider Trading, money laundering, etc. That’s a little harsh if you ask me. I mean, it’s not like he did what my best childhood friend did. My childhood friend stole a truck when he was drunk one night,(stupid and reckless, I know), then when the cops got him pulled over they found a little bit of a white powder substance that is illegal if you know what I mean. Under a gram. He got 4 years. Paroled after serving 3.
If you can’t tell by now, I’m being sarcastic. This article is not at all about fraud in the stock market, I just wanted to point that out. You can be 18, and make a dumb decision that in all honestly probably deserved jail time, but 4 years? Then you get these white-collar crime guys like Belfort, who ruin thousands of lives, defraud the public and companies out of millions and millions of dollars, live lavish lives, never pay the restitution they owe, and they get a tap on the finger. I hate the saying, “slap on the wrist.” These infinitesimal, tiny, laughable jail sentences, coupled with the early releases and the cozy federal prisons they do their time at are a tap on the finger for the crimes they committed and the damage they’ve done to average, blue-collar Americans who are just trying to get by.
How To Apply This To Your Investing In Reality
What Buffet was talking about is simple. Most people who decide to get into the stock market, don’t have even a quarter of the knowledge that they should have before entering. Therefore they attempt to beat the market, blindly buying stocks that are overvalued, and selling them after the inevitable 10% loss, thinking it’s just a fluke and then buy another “premium stock”, only to see more red and larger deficits in their portfolio p/l.
Therefore these people, and I adamantly agree with Buffet, should just stick to low-cost, tax-efficient broad market index funds if they choose to enter the market and manage their own portfolio. He also talks about the concept of hiring a professional to manage your assets and portfolio, and then they in turn attempt to beat the market. The problem with this approach is that they generate commissions from executing trades, but they will also get paid even if they make absolutely none in some of these funds.
Which leaves you thinking, “Hey, wait a minute. If this guy hasn’t made any trades for me this month why should I have to pay him this fee?”
This leads to the “professional” overtrading because he wants the appearance of activity, and even if he achieves the unlikely result of beating the market, say by 6%, the amount you paid in taxes and commissions, and then brokerage or fund fees… you might be worse off then the first guy.
Then you have the Buffets. People who truly delve into the industry their involved in. They only make trades that make sense to them, and only in companies that are solid and they knew this for a fact because they have done their homework on the company. If you can commit to the art of investment like that, and you’ll truly put the work in to get the results, then there is no reason to diversify. Why would you? If you truly studied a company, and know that the future looks fantastic for them, or you have some knowledge of a new product coming out because of your due diligence, or whatever valuable information you have regarding them, why not push the chips all in? You’ll make a fortune if you right and all of your assets are with the winner. This doesn’t mean you buy one and only one stock. You have to have some balance but if you understand what I’m talking about then there is no need to further explain and you’ll know exactly what buffet and many others like him mean when they talk of this.
Just be truthful to yourself and the rest will follow. Do your homework and the results will begin to present. Always learn and never stop.
By: Steven Prentice
Originally published at http://theselfhack.wordpress.com on November 8, 2020.
