Your methods may change with the market, but your core principles should stay the same.
Following the crowd can be an effective strategy. If everyone’s running away from something you can’t see, it’s probably a good idea to join them. But when it comes to investing, it can be problematic. By definition, the majority can’t do better than the average. So to be a successful investor, you have to train yourself to go against the crowd.
Warren Buffett’s investment style reveals that there’s only one instance in which you should put your money on the line: when you totally understand the whole picture and the best course of action. In all other cases, you should pass. Even if everyone else is making money.
The key message here is: Your methods may change with the market, but your core principles should stay the same.
Buffett has always been a cautious investor. When he began his career as a professional investor in 1956, the stock market was generally considered to be too high. But instead of correcting itself, stocks continued to creep up. Buffett not only stayed true to his strategy, but he also doubled down on his ultra-conservative investing approach. He knew a correction was coming, he just didn’t know when.
Meanwhile, other hotshot investors were making big money. In New York, Jerry Tsai had invented a new kind of investment, which took advantage of the general public’s new appetite for speculation. Tsai’s approach was the opposite of Buffett’s. He’d jump in and out of stocks at the drop of a hat.
Tsai’s approach worked, for a while. He earned fabulous sums for his firm, even as his fund lost and gained wildly with market swings. But Buffett remained convinced that it wouldn’t last.
When the market reached a new high in 1966, Buffett finally acted. He announced that he wouldn’t be accepting new partners and halved his performance goal. Miraculously, his fund continued to do very well: 1968 was its best year with a 58.8 percent return. But Buffett knew when to fold his hand. He was done risking his fortune on a market that was bound to crash.
Tsai’s end was imminent, and he ultimately saw it coming too. He sold his fund at just the right moment in 1968. In the early 1970s, the Dow experienced its most spectacular crash since the Great Depression. Buffett’s net worth was unaffected, because he had taken all his money off the market. Tsai barely dodged defeat, but his investors lost 90 percent of their portfolio assets.
Buffett’s courage of conviction is a worthy goal for all investors, if not people more generally. Figure out what you believe in, and when the right opportunity comes along, bet big. You almost can’t lose.