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The Best Approach Is Simply To Ignore All Macroeconomic Risks
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In the Journal today, I want to give you the single best piece of advice I ever got about investing. And I want to show you – with a real example – exactly what a great investment looks like.
In 1996, in his annual letter, Warren Buffett spelled out exactly how to become a great investor:
To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing, or emerging markets. You may, in fact, be better off knowing nothing of these…
Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, 10, and 20 years from now…
You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.
When carried out capably, an investment strategy of that type will often result in its practitioner owning a few securities that will come to represent a very large portion of his portfolio. To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team.“
And Buffett offered this one important caveat:
Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.”
Today, there’s more macroeconomic risk to our economy than there has been since the 2008 Global Financial Crisis.