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How can you become one of the 10% who makes money on the stock market? | by Christian Soschner | August, 2022

Warren Buffett’s 3 Strategies for Down Markets

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One of the best ways to create solid cash returns is on the stock market.

Have you ever tried investing in the stock market?

Here is a shocking truth:

According to popular estimates, as much as 90% of people lose their money in stock markets, and this includes both new and seasoned investors.

90% of all investors fail. Most retail investors, fund managers, and seasoned and new ones don’t make any money.

The minute someone starts investing, the odds are stacked against him. Isn’t that scary?

The big question on the table is:

How can people avoid making common mistakes, and start making money?

Find a great mentor when you want to learn a new skill. It is one of my core principles before making decisions.

2022 is a great year — compared to 1987. No, not because some markets crashed or there is a lot of uncertainty on the table.

Never in human history has access been easier and simpler to the world’s best minds than today.

Read it again.

When I wanted to learn something new back in the 80s, I had to rely on the community I was born into or travel the world.

Today I have to use my phone and Google to find videos, books, and articles from the world’s greatest minds. Not only do they provide their wisdom only, but also many fans — like me — dissect their words and add their thought processes to them.

Warren Buffett is one of the world’s best investors, and the internet is overflowing with his investment advice.

Warren Buffett and his partner Charlie Munger run the investment conglomerate Berkshire Hathaway and have had an average return of 20% over five decades.

In my eyes, the longest active fund managers with a trackable investment return.

Here are three pieces of advice from Warren Buffett:

Warren Buffett is well aware of the statistics that 90% of all investors fail.

Over a decade ago — in 2007 — Warren Buffett said that an ETF that mirrors the development of the S&P 500 index is the best solution for most retail investors.

He praised the low cost of the ETF structures and considered the S&P 500 to resemble the entire US economy. On average, the S&P 500 annualized return for the last 500 years is 9.05%.

The cost structure is mostly below 1%. One of the most famous S&P500 ETFs has a cost structure of 0.03%. It is nothing.

That’s why Warren Buffett said he would win against any hedge fund with simply an investment in the S&P 500 index, and he put 1 million dollars on the table to prove it.

Ted Seides picked up the challenge and selected a basket of hedge funds.

What do you think who won?

Warren Buffett outperformed the basket of hedge funds by over 40% in 10 years.

The first thing to become a successful investor is to be honest with yourself:

How much time do you want to invest in investing?

If your answer is less than 40 hours per week, probably the best choice is to invest in an S&P500 ETF, allocate 10-50% of your monthly income and let it sit.

For those who decide to make investing a serious side hustle, be prepared to spend your evenings and weekends with one thing:

Reading stock market news and quarterly reports

You will travel to investors’ meetups, annual shareholder meetings, and conferences during your holidays.

Why?

In all circumstances, you want to be on top of the industries you put your money into.

The number 1 investment mistake is investing in companies and industries you don’t understand. Once you’ve decided to become an investor, you need to learn everything you can about the initiatives you support.

My biggest investment mistake was because I ignored rule number 1. It was back in 2015 when I discovered fintech.

The banking system is old, systems are often outdated, and not much innovation happened in the last thirty years. Fintechs made proper claims around things they wanted to change.

Today everybody can settle their payments with an Apple Watch. In 2015 it was impossible.

But I didn’t research properly. I put a large junk of capital into the German company Wirecard. Long story short — Wirecard went bust, and the money was lost.

Proper research and keeping the position small relative to the other investments would have cut my losses.

Always remember Rule #1.

The next proverb that Warren Buffett and Charlie Munger coined.

I also like the version that is attributed to Baron Rothshield:

Buy On The Roar Of Cannons, Sell On The Sweet Sound Of Violins

This quote is often misinterpreted as the purchase during war times. I have a different interpretation.

Every market moves in cycles with a long-term upward trend until it is disrupted and replaced with new technology.

Energy is one of the sectors that demonstrated such cycles perfectly in the last ten years.

Up until 2015/16, the prices and industry were beaten down. I remember oil prices around 20-30 dollars per barrel. Look it up on the internet.

Today, oil prices in Europe range between 90-130 dollars/barrel. Other sources of energy show similar tendencies.

And guess what? Energy stocks are going up too. Even Warren Buffett purchased Chevron and Occidental Petroleum recently.

High oil prices with relatively stable production expenses produce one result:

Profits that translate into increasing cash inflows, which generate more value

The right time to buy energy stocks was back in 2015/16 and wait for 5-10 years.

Almost nobody did it because the herd was collectively moving towards tech stocks.

In his book “The 7 Spiritual Laws of Success,” Deepak Chopra wrote:

What goes up must come down. And I like to add: … and can rise again.

No sector stays beaten down all the time. It is with everything in business. The first movers have followers. Those followers gather the crowd into an industry.

This behavior creates upswings. The last bag holders usually enter at the top of the cycle.

In the last two years, the entire tech sector was in a huge upswing driven by the FED’s money printing. Practically all governments and central banks flooded the market with capital.

Those who invested in November 2021 have drawbacks of 80-90%, while energy stocks are soaring.

Warren Buffett has mastered this skill of buying private and public companies with what he calls a margin of safety.

In the Podcast “The Investor’s Podcast,” Bryan Lawrence told a story about a meeting with Warren Buffett.

He was with a group of people who wanted to accomplish what Warren Buffett did — but faster.

The usual question. He said the average stock goes up and down annually by 80%.

Again:

The average stock differs between the high and low points of 80% annually.

Bryan thought that Warren Buffett was out of his mind. When he returned to his office, he did some calculations and found that Warren Buffett was right.

The market swings by 80% on average, but the businesses’ value does not change. A great business stays a great business and a crap business…

How I plan to use this information:

  • Whenever I identify what I believe is a great business, starting with a first small step and wait.
  • Whenever I see the stock price falling, I add to the position until it has 2–3%
  • Repeat

Warren Buffett wants to buy businesses to own them forever. He has no intention to interfere with management, the daily business, or the strategic setup.

The only thing he sometimes adds is that he and Charlie act as a cheerleader for their companies.

He says that only when you are willing to hold a company for ten years, you should own it for 10 minutes.

Many retail investors treat the stock market like a casino. They need quick money to buy trendy stocks and hope they go up.

Well…do you remember that 90% of investors don’t make money?

The best example recently was the Reddit group wallstreetbets, which gathered retail investors to bet against short sellers.

Some might make money, but the average investors lose in such games—only those lucky enough to be the first in and first out win.

Warren Buffett also uses such market swings, which are not much different from Wallstreet bets.

His stock picks aren’t meme stocks. He and his team analyze the stock market and observe businesses sometimes for years or decades before they invest.

Apple, for example. It took Warren Buffett up until 2016 to get his feet wet in Apple juice. He completed his buying spree in mid-2018.

Despite some volatility, it is surprising that Apple’s position did not change much in the last four years.

Whenever you allocate capital in stock, remember that this is capital you won’t take out of the market again, except for some serious emergencies.

Every time I buy a stock, I keep in mind what Warren Buffett says:

  • Do a proper due diligence
  • Be patient and take your time.
  • Stock swings about 80% every year. No need to hurry
  • Take a first small position and build it up over four years in downswings
  • Hold the stock forever, but occasionally trim it when it becomes too big

After all, we are all retail investors, and even the pros can’t foresee everything.

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This article is for informational purposes only. It should not be considered Financial, Investment, or Legal Advice. Consult a financial, investment, or legal professional before making significant decisions.

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