After a rough 2022 in the stock market for many investors, some may be wondering how best to approach 2023 and the uncertainty it's sure to bring. And who better to lean on for investment advice than the Oracle of Omaha, Warren Buffett?
Buffett and his company, Berkshire Hathaway, have achieved remarkable success in the stock market, so when he offers advice, investors rightfully pay attention. Here are three Buffett tips to guide you through 2023.
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1. Focus on finding undervalued stocks
Buffett may very well be the poster child for value investing. Value investors look for stocks priced below their intrinsic value, hoping to profit once the market prices the stock "correctly." For example, if a stock is trading at $200 and an investor believes its intrinsic value is $250, they would invest in the stock and look to (at minimum) profit from the 25% increase.
There are always undervalued stocks in the stock market, but there will likely be far more in 2023 because of the bear market we've experienced for the better half of the past year. As stock prices have been dropping across the board, there's a strong chance many great companies have overcorrected and are currently trading well below their intrinsic value.
Take a company like PayPal Holdings (PYPL +1.25%), for example, which is down nearly 75% from its July 2021 high. If you believe in PayPal and its long-term potential, you may find the stock is undervalued, as it's as cheap as it's been in years. Low price isn't synonymous with value, but plenty of great companies have seen huge stock price drops while their businesses continue to trend in the right direction.
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2. Look for sustainable dividends
Buffett has always been a fan of companies with stable earnings, a cash-filled balance sheet, and a safe and growing dividend (with an emphasis on both "safe" and "growing"). It's one thing for a company to pay a dividend, but you always want to make sure the dividend is sustainable and not stagnant. If you're a long-term investor, you don't want an unreliable dividend that could potentially be gone at any moment.
Since many stocks experienced notable price drops in 2022, dividend yields are the highest they've been in a while. But all that glitters isn't gold. Or in the case of investing, all high dividend yields aren't good dividend yields. Don't invest in a company simply because its dividend yield is high; invest in it because it's a great company that happens to pay a good dividend.
Investing in companies that pay dividends can make it easier to ignore short-term noise in the stock market because you'll be getting paid either way. A stock's volatility doesn't matter as much as long as the dividend continues to be paid. If 2023 shapes up to be as unpredictable as it seems, that reliability will be nice to have.
3. When in doubt, invest in an S&P 500 index fund
The S&P 500 is the stock market's most popular index, tracking the largest 500 public U.S. companies by market cap. Not only is the S&P 500 the most followed index on the stock market, but it's also a one-stop shop Buffett swears by. So much so that he famously made a $1 million bet that the S&P 500 would outperform select hedge funds from Jan. 1, 2008 to Dec. 31, 2017 -- and won by a landslide.
The S&P 500 is great for many things, but one of its qualities that will make it great in 2023 (and going forward) is its diversification. As of January 2023, the S&P 500 index contains companies from all 11 sectors:
- Communication services (7.3%)
- Consumer discretionary (9.8%)
- Consumer staples (7.2%)
- Energy (5.2%)
- Financials (11.6%)
- Healthcare (15.8%)
- Industrials (8.7%)
- Information technology (25.8%)
- Materials (2.7%)
- Real estate (2.7%)
- Utilities (3.2%)
This is very different from the other two major indexes: the tech-heavy Nasdaq Composite and 30-stock Dow Jones. Having this diversification helps ensure your portfolio's success doesn't rely on too few stocks or industries.
In a 2021 shareholders meeting, Buffett told everyone, "I recommend the S&P 500 index fund, and have for a long, long time, to people." And it's for a good reason. Historically, the S&P 500 has returned around 10% annually over the long term, which is more than what a lot of actively managed funds can say. This doesn't guarantee it'll continue in the future, but there's also no reason to believe it won't continue to be a great long-term option.
