3 quotes from Warren Buffett that apply to today’s stock market
The year 2021 marks the start of a crazy market. Futures and options that initially derived their value from stocks began to affect the price of stocks. actions even. Digital tokens that are not widely accepted and regulated have made many millennials rich and many poor. The world is going crazy day by day. If you think Warren Buffett is old and doesn’t know anything about the new world, you are wrong. The wise words of the 90-year-old investor apply to today’s stock market menagerie.
Warren Buffett quotes reveal how Wall Street works
Buffett’s letters to shareholders contain an ocean of wisdom about how Wall Street works. At all times, each stock price is a well-planned strategy. If you learn to control your temper, let go of fear and greed, and follow the rules of the game, you can win.
Buffett’s fFirst lesson: Getting rich twice is stupid
Buffett said, “Anyone who’s gotten rich twice is stupid. Why would you want to risk what you need and have for what you don’t need? ”
What does it mean? Many Redditors went public in January when the WallStreetBets subreddit revealed a strategy to take advantage of hedge funds’ short position in Gamestop, AMC, and Blackberry (TSX: BB) (NYSE: BB). These stocks jumped 50 to 300% as Redditors started buying them. They did not buy to invest but to force hedge funds to buy back those stocks at a higher price.
Some fundamental investors sold the stock and got rich. But then greed overtook logic, and they bought back the stocks to make more money. The result was the end of the short squeeze. Those who made gains on stocks meme switched to Dogecoin and Bitcoin – again, not to hold, but to raise the price and withdraw money.
Those who bought AMC and BlackBerry were stuck with expensive stocks. A similar thing happened with the holders of Dogecoin. The coin is down 60% from its May high. Editors who got rich in January and May are now poor.
As Buffett said, why risk what you need (i.e. fiat currency that you can use as a medium of exchange) for what you don’t need (meme stocks and crypto? -coins that are of limited use and that you don’t want to keep)? He said, “If you are already rich there is no benefit in taking a lot more risk, but there is shame on the downside. ”
Second lesson: returns decrease as movement increases
Referring to Isaac Newton’s law of motion, Buffett mentionned, “Fourth Law of Motion: For investors as a whole, returns decline as motion increases. ” Here, Buffett almost predicted the entire meme stock fiasco. He quoted Gertrude Stein: “The money is still there, but the pockets are changing.
Trading in stocks comes at a price. Although there are 0% commission brokers, they benefit from high volume trading. With every trade, a commission and a tax reduce the actual returns. Such artificial movement also has an impact on the fundamentals.
BlackBerry has largely tied executive compensation to equity. Management profits when the stock price is doing well. But if the stock goes up without any sustainable commercial effort, management will sell its stock and have little motivation to perform. The increase in movement could hurt returns.
Lesson Three: It’s Not How You Sell, It’s How You Say It
Finally, Warren Buffett noted that deals on Wall Street happen because someone arranged them or accepted them. It’s nothing but a sale. In storytelling form, he shares a lesson he learned from his brother-in-law: “Warren, that’s not how we sell them. This is how you tell them.
Many retail investors believe that 0% commission brokers offer free trading. But like social media, the core business of these brokers is data, not brokerage. They sell trading data analytics to institutional investors, but tell retail investors it’s free trade. Likewise, Dogecoin prices have skyrocketed as Elon Musk sold it out telling the public that it has the potential to go to the moon.
At the end of the line
These lessons teach one thing: invest in the business, not in the stock price.
Increase returns by investing in fundamental stocks.
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This article represents the opinion of the author, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We are straight! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer, so we post sometimes articles that may not conform to recommendations, rankings or other content. .
Foolish contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends BlackBerry.