Famed investor Warren Buffett, or the “Oracle of Omaha” as some call him, is a legend of the stock market and still relevant today. Its holding company Berkshire Hathaway is one of the world’s largest companies.
If you look closely at Berkshire, you’ll see countless companies it’s held without selling for a few decades. It’s a drastic difference from what you see from the talking heads on TV who are always talking about the “hot trade” of the week.
So what can you learn from Warren Buffett that will help you make more money in the market? Here are three benefits of Buffett’s long-term buy-and-hold approach to stocks.
Pay less tax
Taxes can be the silent killer of investment returns. When you sell an asset (e.g. stocks), your gain is called a capital gain. Of course, most governments will charge a portion of that profit with a capital gains tax.
In the United States, capital gains are taxed differently depending on how long you hold a stock. Gains from shares held for less than one year or short-term capital gains are taxed as ordinary income.
Well, if you did well on a sale and made a sizeable profit, those profits could be taxed at a higher rate if they push your total income into a higher tax bracket — up to 37% in the United States.
Gains from a share held for more than one year, or long-term capital gains, are taxed at a lower rate, between 0% and 20%, depending on your income tax bracket. This can mean paying thousands less in taxes on a big sale. In other words, the IRS rewards long-term investors, so don’t look a gift horse in the mouth!
Basics and patience create less stress
The stock market has been dubbed “casino” by some, likely because of the irrational volatility that occurs on a daily basis. Lots of things can move stock prices in the short term; Check out how growth stocks have been up and down over the past six months! There are always headlines, government statistics, or geopolitical events that can make markets rise or fall. It’s almost odd why so many people try to “trick” the market when it’s so arbitrary.
Meanwhile, a company’s fundamentals tend to drive its stock price over a multi-year period. If you own a growing and profitable business with competitive advantages, the market will usually track it down at some point and reward it with a higher price.
Maybe you have the next one Amazon, but even that stock went from $100 to $10 in the early 2000s. Was Amazon a healthy company one year and on the brink of bankruptcy the next? No, only the market is irrational, as it does from time to time. The lesson? Focus on the basics and give companies time to show themselves. Anything in the near future is more of a guess than anything.
You won’t trip over your own feet
After all, Warren Buffett isn’t trying to be smarter than he needs to be. Great stocks are hard to find, and Buffett doesn’t make it complicated when he finds one; he keeps it until it’s no longer great. That’s why some stocks have been Berkshire Hathaway staples for decades.
He could tell you himself that his biggest mistake was doing too much. He sold Walt Disney twice, costing him potential profits of up to $31 billion.
The broader data supports what Warren Buffett found himself: The more you trade, the worse your investment returns tend to be. Sometimes there are good reasons to sell; a failed investment thesis or unethical management are good reasons to exit an investment. However, when investors try to be the smartest people in the room, it often backfires.
The Ten Second Takeaway
There is so much to learn from Warren Buffett and his long career. Its long-term investment strategy is a simple compass for retail investors to follow and benefit from.
Dealing with stock volatility isn’t easy, and finding great investments is like finding a needle in a haystack. But you can make it easier on yourself by borrowing some wisdom from the Oracle’s success. Find winners, stick with them, and let them do most of the heavy lifting on your wealth-building journey.
This article represents the opinion of the author, who may disagree with the “official” endorsement position of a Motley Fool premium advisory service. We are colourful! Challenging an investing thesis — including one of our own — helps us all think critically about investing and make decisions that help us be smarter, happier, and wealthier.