Warren Buffett got his start by investing in small, unknown companies for less than they were worth. A lot has changed in the decades since, and Buffett has repeatedly said that many of those easy opportunities have long been lost due to a far more sophisticated and informed market.
During Berkshire Hathaway's (BRK.A -0.34%) (BRK.B -0.01%) annual shareholders meeting on Saturday, Buffett's right-hand man, Charlie Munger, had a warning to investors. "I think value investors are going to have a harder time now that there's so many of them competing for a diminished bunch of opportunities. So my advice to value investors is to get used to making less," Munger said.
But before you despair, consider this piece of good news: Buffett believes that short-term thinking and dumb ideas are running more rampant than ever. Investors who combat these impulses with patience can gain an edge over Wall Street.
Here's what Munger and Buffett said about value investing at the annual meeting -- and how their lessons could help you make wise investment decisions.
Image source: The Motley Fool.
Opportunities occur when people do dumb things
Because Berkshire is so big now, Buffett and Munger can't benefit much from investing in traditional hidden gems. Instead, they have to focus more on finding high-quality companies and letting those investments compound over time. Yet value investors around the world still look up to them for their ability to identify what Buffett would call "a wonderful business at a fair price."
Today's media landscape has more voices preaching fast and easy money. There are plenty of dangerous yet enviable success stories built on a house of lucky cards. Buffett believes that part of the problem is that it is easier for people to get the capital needed to pitch an idea or pursue a bad business plan. When these businesses go public, their financials or path to profitability can be cloudy at best. This presents a challenge for investors that have to filter out the noise and determine if a prospective growth stock can bridge the gap between expectations and reality. On Saturday, Buffett said:
New things coming along don't take away the opportunities. What gives you opportunities is other people doing dumb things. And I would say that the 58 years we've been running Berkshire, I would say there's been a great increase in the number of people doing dumb things, and they do big dumb things. And the reason they do it to some extent is because they can get money from other people so much easier than when we started.
Buffett believes he could do well if he were just starting out in today's market by simply ignoring Wall Street's short-term focus and identifying opportunities based on long-term fundamentals:
The world is overwhelmingly short-term focused. And if you go to an investor relations call ... the management is interested in feeding them expectations that will slightly be beaten. That is a world that is made to order for anybody that's trying to think about what to do that should work over five, or ten, or twenty years. And I just think that I'd love to be born today, and go out with not too much money and hopefully turn it into a lot of money.
When Buffett was first starting out, the greatest advantage a value investor could have was access to information. Today, with information beyond the young Buffett's dreams available without much effort, the greatest advantage is the ability to ignore distractions and the discipline to maintain a long-term time horizon.
Focusing on what matters most
Buffett's disdain for speculative gambles and big companies taking advantage of smaller players has been an ongoing narrative for several years. However, Buffett did provide a reassuring comment for investors that are managing less capital -- such as individual investors.
I think that investing has disappeared so much from this huge capitalistic market, that anybody can play in, but the big money is in selling other people ideas that aren't outperforming. And I think that if you don't if you don't run too much money, which we do, but if you're running small amounts of money, I think the opportunities will be greater. But then Charlie and I have always differed on this subject, he likes to tell me how gloomy the world is and I like to tell him, "We'll find something," and so far we've both been kind of right.
One of the biggest advantages of being an individual investor is that your results aren't measured against peers. All that matters is that you achieve your financial goals. Financial goals and aligning your personal risk tolerance with your investment allocation matter much more than beating the market in a given year or two.
Taking advantage of Wall Street's short-term focus
Despite Buffett's steadfast optimism toward the individual value investor, both Buffett and Munger agreed that investing is far harder today than when they first got their start. Munger said the following during the annual meeting:
There is so much money in the hands of so many smart people, all trying to outsmart one another, and outgrow one another, getting more money out of other people. And it's a radically different world from the world we started in, and I suppose it will have its opportunities, but it's also going to have some unpleasant episodes.
In the pursuit of outsmarting each other, Wall Street can often drastically overvalue or undervalue a stock in the short term -- which can lead to generational wealth for long-term investors. Berkshire has a history of taking advantage of mispriced assets, whether it's swooping in to invest in distressed financial institutions or its relatively recent success with Apple.
Buffet and his team began buying Apple stock during a time when its price to earnings ratio was around 12 and Wall Street was skeptical its ability to scale with services revenue. Fast forward to Apple's latest quarter, and it's notched a staggering $20.9 billion just in services revenue -- an all-time high for the segment.
A vote of confidence for individual investors
It's easy to get discouraged by Wall Street's influence and the growing sophistication of public markets. But if the past few years have taught us anything, it's that markets are more sensitive than ever to short-term performance. It can feel like a lot to handle: the wild price swings of 2020, the tech boom of 2021, the steep sell-off of 2022, and the gradual recovery of 2023. But zoom out, and the volatility for high-quality companies was ultimately just noise.
So while the competition on Wall Street may be more intense than ever before, there's a good argument that individual value investors can still do quite well in the stock market so long as they stay principled and patient.
