There are few names as synonymous with the stock market as Warren Buffett, and it's easy to see why. Through his company, Berkshire Hathaway, Buffett has become one of the most successful investors ever. His accomplishments are undoubtedly impressive, but maybe more impressive is just how straightforward his investing strategies are.
There's always a lesson to be learned from Buffett but especially so after a year like 2022, one that's been plagued by a down market and broad economic anxiety. Here are some Buffett-inspired lessons to take away from the year and use going forward.
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Look for value in the chaos
Warren Buffett is a poster child for value investing, where investors look for stocks trading at prices below their intrinsic (or true) value. The goal is to buy undervalued stocks and profit from their rise when the market eventually prices them more accurately. For example, if a stock is trading at $200, but an investor believes the intrinsic value is $240, they'd invest, hoping to (at minimum) profit from the 20% increase once the market recognizes its true value.
And during bear markets, stock prices are dropping across the board. Even great companies will see their stocks pulled downward in the panic, despite the fact nothing has fundamentally changed with the business. It's just a byproduct of broader market conditions.
Let's take American Express (AMEX) as an example. During the bear market caused by the early COVID-19 outbreak in 2020, AMEX stock fell over 45% from Feb. 24 to March 23. Trading around just $70 per share, which many investors would agree was below its intrinsic value, AMEX presented investors with a value play. Those who took advantage of the opportunity have seen strong returns on shares bought during that time, even with the company down 10% in 2022.
Sometimes it helps to go against the grain
One of Warren Buffett's more repeated quotes is, "Be fearful when others are greedy, and greedy when others are fearful." Needless to say, the latter part of that statement applies to much of 2022.
Instead of following the crowd and letting this bear market send you into panic mode, it should be a time to get greedy and seek out bargains if you have the financial means and time to do so. Use these down periods as a time to buy shares of high-quality businesses at a discount. After all, if you liked a stock at $150, it should be even more appealing at $120.
Dividends help you ignore the short term
Dividends are paid out to investors from a company's profits, and they can play an important role in your total returns. While younger companies typically don't pay dividends as they reinvest their profits to keep growing, many older, more established companies pay dividends to reward investors for holding onto their stock and make up for what they might lack in share price growth.
Although Berkshire Hathaway itself doesn't pay dividends, dividend stocks are the backbone of its portfolio, bringing in more than $6 billion in yearly dividend income alone. And thanks to compounding earnings -- which occur when the returns on your investments generate their own returns -- this number is growing quickly.
Aside from the income, one of the best things about dividends is they make it easier to ignore the short-term noise in the stock market. If you're investing in dividend stocks, it doesn't matter as much if the stock price is up 10% one week, down 20% the next month, up 15% the next year, and so forth, as long as the dividend payout continues.
In the past year, AMEX stock has been volatile, but since the start of the year, shareholders -- including Berkshire Hathaway -- have received $1.99 in dividends per share. Dividends reward investors for being patient. You don't need to focus on dividend stocks alone, but they should be a part of your well-rounded portfolio.
