Have you ever wondered why we are willing to hold on to our real estate investments for years even as we trade in and out of stocks?
So, we may buy and/or sell just 1-2 properties in our lifetimes, but the count of stocks we move in and move out of runs into 100s.
Of course the size of the investment plus ability to liquidate (buy and sell) is one factor. But the most important factor that is at work here is – Stocks provide you minute-to-minute valuations for your holdings, whereas you don’t see quotations for your real estate holdings so frequently.
When it comes to stocks, Ben Graham’s mentally-ill fellow Mr. Market comes to you daily and quotes a random price that causes you to behave irrationally.
“Don’t just sit there, do something!” he shouts at you daily, and you gladly take his advice and buy stocks when he quotes a high price and sell when he quotes a lower price.
In other words, like Pakistan’s Shahid Afridi or an Indian cricket team’s tail-ender, you swing at every ball Mr. Market throws at you, without knowing the speed, swing, or height of that ball.
But when it comes to real estate, there is no Mr. Market to yell prices daily at you. So you play with poise, like Ravi Shastri or Rahul Dravid.
Now, if what I have written above is really the case with you, you ought to read Warren Buffett’s upcoming 2014 letter to shareholders, which will be out later this week.
You can however read an excerpt of that letter that Fortune has released here.
In this excerpt, you will find Buffett talk about his real estate investments he made decades ago and the lessons they have served him with respect to his stock market investments.
The excerpt in itself is a wonderful dose of investing wisdom that has made Buffett what he is today. He talks about the importance of…
- Remaining within one’s circle of competence;
- Ignoring Mr. Market’s daily rants;
- Differentiating between a stock’s price and value;
- Paying a fair price; and
- Reading Graham’s Intelligent Investor
Here are five key lessons Buffett asks you to remember at all times (the emphasis is mine), as they will serve you well in your investing journey…
- You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”
- Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.
- If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.
- Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
- Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)
How to Change Your Life
Through all the five lessons Buffett has enumerated above, he has highlighted things that you can learn as an investor.
Investing sensibly, after all, isn’t rocket science.
However, while the rules for success are simple, it is the willingness and integrity to play by those rules that differentiates successful investors from others.
It’s important to remember these age-old rules and stick to them through the times, whatever Mr. Market or others around you are doing.
That is slow, but proven, mantra for changing your financial life for the better while others around you are suffering in their own.