🌼Warren Buffett Explains How To Invest In 2023
## How to beat inflation, the bear market, and price fluctuations
A little unknown fact about Warren Buffett is that every year, after delivering amazing returns to his investors, he also has a tradition of writing long letters to them.
In these public letters, which go way back to 1977, he’s provided everyone with a lot of valuable lessons on the stock market, the economy, and the world at large. Combined with the many interviews he’s released since the 80s, you could basically say this is a _”free investing course by Warren Buffett himself”_.
So, today I’m going to summarize s**ome of Warren Buffett’s tips that specifically apply to the investing scenario that we all face coming into 2023 — a falling stock market, high inflation, high-interest rates, and a lot more**.
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# How To Deal With Market Fluctuations
In the [1987 Chairman letter] Buffett discussed market fluctuations and gave his insights on how to deal with the situation back then. Keep in mind it was the year of the ‘_Black Monday’_ 20% stock market crash, which happened unexpectedly on a random Monday:
> You should imagine market quotations as coming from an accommodating fellow named Mr. Market, who is your partner in a private business.
> Every day Mr. Market appears and names a price at which he will either buy your shares in the business or sell his to you. **Even though the business that the two of you own has economic characteristics that are stable, Mr. Market’s quotations will be anything but that. **At times he feels euphoric and can see only the favorable factors affecting the business, which is why he’ll name a very high price — because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead, he will instead name a very low price.
> **While he’s clearly emotionally unstable, Mr. Market doesn’t mind being ignored. **If his quotation is uninteresting to you today, he will be back with a new one tomorrow.**Transactions are strictly at your option.**
> **Under these conditions, the more manic-depressive his behavior, the better for you. **Mr. Market is there to serve you, not to guide you.
The lesson’s pretty clear here: the only things that matter are the business’s underlying conditions, regardless of what the market has to say about the assets you own. The current price of your share in a business is one of the least important factors to consider in day-to-day operations since it’s not necessarily its real value.
# How To Invest In A Bear Market or Recession
Up next is how to behave when those prices only fluctuate downwards.
In a 2018 interview, he was asked whether he was concerned that the market was down several percentage points that morning:
> Well, no, [I’m not concerned]. That’s good for us. We’re a net buyer of stocks over time, and, just like being a net buyer of food -meaning I expect to buy more food throughout the rest of my life- I hope that food prices go down tomorrow.
> When stocks go down, we’re [investing the same dollar amount], so we always hope that we can buy more shares at a lower price.
> People are really strange when it comes to that. Most people investing are savers, and that means they should want the stock market to go down when they’re buying, but for some reason, they just feel better when stocks are going up.
And that’s what I call a great example of rational thinking: until you’re 55 or more, you should want for the stock market to stay lower so you can buy it for cheaper, and only near retirement you should hope that it goes up.
With that sentence, Buffett also highlights how most people’s reaction to a falling market is purely emotional. You should feel good buying when stocks are down, and you should feel less good when buying at a higher price — but instead, the opposite happens. The stock market is the only place where people don’t buy during a sale.
And when it comes to a potential recession, this is what he had to say in the 2016 shareholder letter:
> Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.
## [Millennials Should Rejoice If a Bear Market Occurs
### Rising stock prices are actually bad for young people
# How To Deal With High Inflation
The last couple of years hasn’t been the first time Buffett has seen high and rising inflation. In fact, he’s already explained how people’s attitude should change in these circumstances:
> Unfortunately, with inflation, the earnings reported in corporate statements are no longer the dominant variable that determines whether there are any real earnings for you, the owner.
> Only gains in purchasing power represent real earnings on investment. If you (a) forego ten hamburgers to purchase an investment; (b) receive dividends which, after taxes, buy two hamburgers; and (c) receive, upon sale of your holdings, net proceeds that will buy eight hamburgers, then (d) **you have had no real income from your investment, no matter how much it appreciated in dollars**.
> You may feel richer, but you won’t eat richer.
Essentially, he’s saying you should no longer aim for a 7% return on investment if your cost of living has gone up by 10%. And this is especially true for bonds, since they don’t bring inflation protection by design:
> There is no mystery about the problems of bondholders in an era of inflation. When the value of the dollar deteriorates month after month, a security with fixed income and principal payments denominated in those dollars isn’t going to be a big winner. You hardly need a Ph.D. in economics to figure that one out.
But, on the other side, if you want to find the best investment in an inflationary environment, this is what Buffett suggests:
> The best investment against inflation is to improve your own earning power.
> Good skills, unlike currency, are inflation-proof. If you have a skill that is in demand, it will remain in demand no matter what the dollar is worth. Whatever abilities you have can’t be taken away from you. The best investment by far is anything that develops yourself, and it’s not taxed at all.
> The **best passive investment, however, remains a good business**. If you maintain an interest in a good business you’re most likely to maintain your purchasing power over the long term, regardless of the currency.
And then, in another famous letter, he said these good kinds of businesses have two characteristics:
> 1. an ability to increase prices rather easily (even when demand is flat and capacity is not fully utilized), without fear of significant loss of market share or unit volume,
> 2. an ability to accommodate large dollar increases in business (produced by inflation) with only a minor additional investment of capital.
This is also what he likes to call a “moat”, which is, to put it in his own words: _”the reason why people that have an iPhone want to continue with that product even if it costs a little more”_. That’s the kind of business you should buy if you want to fight inflation, they’re the most likely ones to come out on top. Especially if an increase in prices isn’t accompanied by rising costs.
# How To Invest With Rising Interest Rates
> “Interest rates are to the value of assets, what gravity is to matter. And if I could reduce gravity’s pull by 80%, I would be in the Olympics jumping, if you see what I mean.”
What Buffett is saying there is that, usually, asset prices are inversely correlated to the value of risky assets. You can easily verify that by looking at what a decade of zero interest rates has done to US stocks: it has ballooned them by three or four times their initial prices. And that price jump was not due to rising profits, I can assure you of that. It’s no surprise Buffett didn’t buy that many stocks in 2021.
But the other side of the discussion is that higher interest rates also make safer investments, like bonds and savings accounts, much more attractive.
You should always keep in mind what Buffett said before about investment returns vs how many hamburgers you can buy, but still. This decline in asset prices due to higher interest rates is not yet reflected in all asset prices, so much so that some riskier assets are starting to look a bit ridiculous in comparison:
## [Why Treasury Bonds Might Now Be a Better Investment Than Tech Stocks
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### Oh how the times have changed in 2023…
Just as Buffett suggested raising your required rate of investment return in cases of high inflation, you should do the same with higher interest rates. It doesn’t make sense to invest in Tesla for a mere 3% yield plus growth when treasury bonds offer more than 4%. Just like a treasury bond would still be a bad investment, if hamburger prices are up 12% or something.
Contributed by Thomas Herold
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