Warren Buffett’s Most Important Lesson for Investors

It was Warren Buffett who said, “Buy a business, don’t rent stocks.”

We couldn’t agree more with the Oracle of Omaha! Many individual investors make the mistake of focusing on stocks and the stock market at the expense of focusing on the underlying companies.

Many people continue to ignore Buffett’s most important lesson: Analyze the business first. The individual investor plays a dangerous game when he/she tries to divine whether a stock is going to go up or down next quarter. It’s tough to do well in a guessing game, and it’s even tougher to do well consistently.

You might know how Wall Street sells its predictions to the public. A hundred analysts will make a hundred different predictions, and sure enough, when the year is over, you will hear from only the 10% who just happened to guess right!

My opinion is that the market offers no magic bullet or money machine. If you’re a buyer, the best you can do is try to find a good company with strong fundamental prospects that is currently undervalued or otherwise under-recognized (or maybe temporarily beaten down because of an overreaction).

This brings us to what I like to call the first “binary combination” — there are many good companies, but not all are good investments. We’re looking for: 1) good companies; 2) at the right price. A good company can be too expensive; and a bad company is never cheap enough.

The problem with investing in good companies at the right price is that you need patience. Nothing good happens overnight, and it might take a while for the market to catch up with your (hopefully) correct judgment.

If you are being told that picking stocks is easy, think again. However, with the right team in your corner, the market can be beaten and money can be made.

It has often been said that in order to make money investing you need to be correct and contrary, which is my second binary combination of smart investing. In other words, you can be correct, but if everybody else agrees with you, you probably aren’t going to outperform the market.

You need to be correct and “apart from the pack.” Once you realize this, you’ll see how it is very difficult to beat the crowd by watching cable news or even reading the newspaper — no wonder some people think the market is efficient. In order to be contrary, you have to embrace your uniqueness and play on a different field. This is not to say you should ignore fundamentals, far from it. You have to respect the foundation and the basic tools of analysis. But, on top of that foundation, you are better off approaching the market suspiciously.

By looking for good companies in the world of real business and commerce, you are removing yourself from a game that by nature is rigged. Instead, participate in the worthwhile activity of finding businesses that can put your capital to good use. Remember, that is what investing is supposed to be: letting companies rent your hard- earned money so they can grow their business and pay you back, and then some.

Anyone serious about research subscribes to industry journals. If you like tech, you read tech periodicals. If you like science, read up on science. This strategy means you can let the market gyrate on its endless recirculation of gossip while you locate expertise that will help you find the growing companies worthy of your money.