In the past couple of weeks, Buffett filed as having sold US$50 billion ($83b) worth of Apple shares, cutting his stake in the tech giant by around half, while Berkshire has sold a total of US$75.5b worth of shares in recent days.
These investing decisions have sparked interest and speculation around the market. While Buffett himself hasn’t provided a detailed explanation for these specific actions, we should expect the unexpected.
Buffett, known as the “Oracle of Omaha”, has built a personal fortune of more than US$100b by going against the crowd and buying undervalued stocks that others shun. He is the epitome of a value investor, who believes the value of the market, or a stock is below its intrinsic value.
Contrarian investing is based on the belief that herd behaviour often leads to the overpricing or underpricing of assets, therefore creating opportunities for potential profit. Simply put, contrarian investors go against the current market trends of the day. Contrarians believe that when most investors are buying, it may be an opportunistic time to sell, and vice versa.
Buffett once said it’s wise for investors “to be fearful when others are greedy and to be greedy only when others are fearful”.
Why should investors be fearful when others are greedy?
The notion comes from understanding market psychology. Often investors’ decisions are driven by human emotions such as fear and greed. For example, greed can result in investors buying and bidding up prices in the market, hoping for ever-larger returns and profits. On occasions, this can in turn lead to asset price bubbles that may eventually pop.
A value investor looks to purchase stocks that are trading below their intrinsic value – the perceived or true value of an underlying asset. This doesn’t always equate to the current market price because assets can be either over or undervalued. In essence, price is what you pay for an asset and the value is what it’s worth. If an investor pays too high a price, then the potential returns can be severely impacted.
Contrarian investors can potentially benefit from market inefficiencies and exploiting opportunities that others might overlook. To be a successful contrarian investor, discipline, patience, and a strong conviction in one’s own ideas are needed. When making investment decisions, Buffett looks to invest at a good price and takes advantage of opportunities when others are feeling fearful. As he has famously said in the past, “it is much better to buy a wonderful business at a good price than a good business at a wonderful price”.
Examples of Buffet’s successful approach to “value investing” include companies such as Coca-Cola and American Express. When initially purchased, these two companies were seen by Buffett as being undervalued with a solid, long-term runway for potential growth. The history books have certainly proven this thesis and timing to be correct.
Some of the other famous contrarian investors are George Soros and Michael Burry, both of whom have profited handsomely from their contrarian investment styles over the years.
Buffett and his long-time friend Charlie Munger, who served as vice-chairman of Berkshire Hathaway until he passed away just shy of his 100th birthday in late November 2023, began operating Berkshire in 1965. During that time, the stock has risen at an annualised pace of 19.8%. The S&P 500 has had an annualised return of 10.2% during the same timeframe. Berkshire Hathaway is currently sitting on a pile of cash worth approximately US$277b, according to the latest figures from The Economist.
Adopting a value-oriented, contrarian mindset might mean looking beyond the popular stocks or sectors and considering investments in areas that may be temporarily out of favour but have long-term potential. This requires patience, a deep understanding of the companies you invest in, and the ability to stay calm during market fluctuations.
What can we learn from this?
Buffett’s emphasis on holding cash to seize opportunities is also a valuable lesson. In a small market like New Zealand, where investment options may be limited, having a cash reserve can allow investors to act quickly when attractive opportunities arise, providing liquidity, income and diversification. Cash provides the investor with a means to take advantage of investment opportunities as they arise, which is key for a contrarian investor.
While the principles of value investing and contrarian thinking can be beneficial, it’s essential for investors to adapt these strategies to their local market conditions and personal risk tolerance. For those looking to deepen their understanding of these concepts, Buffett’s annual letters to Berkshire Hathaway shareholders are a goldmine of insights.
Additionally, reading The Intelligent Investor by Benjamin Graham, Buffett’s mentor, can provide a solid foundation in value investing. By applying these timeless principles with a local perspective, New Zealanders can work towards building a robust and resilient investment portfolio.
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