Page 37 - Flathead Beacon // 12.31.14

FLATHEADBEACON.COM BUSINESS MONTHLY FINANCIAL CORNER Jesse Rigler
What Can You Learn from the W Oracle of Omaha?
ARREN BUFFETT, THE and greedy only when others are fearful.” “Oracle from Omaha,” is con- Trying to “time” the market — that sidered one of the most suc- is, attempting to buy when prices are
DECEMBER 31, 2014 | 37
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cessful investors in history. Yet while the investment world may seem com- plex, Mr. Buffett’s advice is actually pretty simple. Here are a few Buffett quotes, along with some suggestions on putting them to use:
“Whether we’re talking about socks or stocks, I like buying quality merchan- dise when it is marked down.”
Essentially, this means you should look for good investment vehicles whose price may have dropped. A “bear” mar- ket tends to drag down many stocks — even those with strong fundamentals and favorable prospects. These stocks might then be considered “bargains.” One way to determine whether a stock is “expensive” or “cheap” is by looking at its price-to-earnings ratio (P/E). For ex- ample, if Company “A” has a share price of $20 and earnings per share of $4, then it has a P/E of 5. On the other hand, if Company “B” has the same share price of $20, but has earnings per share of $2, its P/E would be 10. So it would be con- sidered more expensive than Company “A.” Be aware, though, that the P/E ratio works better as a measure of cost when you are comparing two companies in the same industry.
“Time is the friend of the wonderful business, the enemy of the mediocre.”
Be prepared to own quality stocks for the long term; over time, your con- fidence may be rewarded. On the other hand, if an investment is not of high quality, its flaws will be revealed over the years.
“If investors insist on trying to time their participation in equities, they should try to be fearful when others are greedy
low and sell when prices are high — is a difficult task. Too many people do just the opposite: They try to “cut their loss- es” by selling when the market is down and then go after the “hot” investment whose price may already be as high as it’s going to go. Mr. Buffett clearly is not in favor of a market timing approach, and those who try to do it, he says, are probably better off by going against the crowd. Keep in mind, though, that even when holding investments rather than trying to time the market, investing in equities does involve risk, including po- tential loss of principal.
“When we own portions of outstand- ing businesses with outstanding manage- ments, our favorite holding period is for- ever.”
When should you sell good invest- ments? Never, according to Mr. Buffett. And while this endless holding period may not be possible for all of us, you get the idea: the longer you keep a good in- vestment, the better off you may be when you do sell.
“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates ratio- nality like large doses of effortless money.”
The lesson here? Be an investor, not a speculator. A long run-up in the market can increase your wealth, but it may also make you prone to risky behavior if you think that all your investments will rise indefinitely.
As an investor, you may well want to consider Mr. Buffett’s ideas— after all, they’ve sure worked well for him.
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FROM JEFF 0’BRIEN, CPA AND HIS STAFF
Jesse Rigler is a financial advisor at Edward Jones in Kalispell.
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