some people are not actually emotionally or psychologically fit to own stocks but i think they're more of them would be if you get educated on what you're really buying which is part of a business that there is mr warren buffett the world's best investor he took over berkshire hathaway in 1965 and since then the stock has averaged 20 returns per year that's double the return of the s p 500 each year which over time gives berkshire a total return of 2. 8 million percent versus the s p's measly 23 000 and he's done this by following a very simple set of rules that was summarized quite perfectly by warren buffett's long-time business partner and berkshire hathaway vice chairman charlie munger we have to deal with things that we're capable of understanding and then once we're over that filter we have to have a business with some intrinsic characteristics that give it a durable competitive advantage and then of course we would vastly prefer a management in place with a lot of integrity and talent and finally no matter how wonderful it is it's not worth an infinite price so we have to have a price that makes sense and gives a margin of safety considering the natural businessitudes of life it's a very simple set of ideas and the reason that our ideas have not spread faster is there too simple charlie's right it's a pretty simple four-step approach and i should mention at the top of the video that this approach never changes no matter the weather in the market so whether this video was titled buffett's advice for 2022 or buffett's advice for 1984 these four investing pillars would always remain the same but in 2022 there's no doubt we've got some tricky additional factors to negotiate with our investing we're facing absurdly overvalued stock markets inflation is running quite hot and we're likely going to see some interest rate hikes this year because of that inflation so in this video let's listen to warren buffett's advice on each of these three key factors and we start with the problem of overvalued stock markets how do we go about investing this year when everything is so expensive well if you're an active investor chances are we might not actually get that many opportunities to buy undervalued stocks within our circle of competence this year this is what warren buffett said on this matter back in 2019 in his annual letter to shareholders he said in the years ahead we hope to move much of our excess liquidity into businesses that berkshire will permanently own the immediate prospects for that however are not good prices are sky high for businesses possessing decent long-term prospects now yes buffett is trying to buy entire businesses while we're just trying to buy a few shares but it's all the same thing at the end of the day and no doubt he has really struggled to find places to put his money in the past year or two but he doesn't just burn his money on overvalued stocks right that is a cardinal sin of investing instead he just continues to accumulate cash and he waits patiently berkshire hathaway's cash pile has grown from 84. 4 billion in q3 2016 to 149.
2 billion in q3 2021 so it's by no means ideal but remember you don't make money when you buy or sell you make money while you wait be patient for those right opportunities to come along and don't get sucked into buying average investments in a very overvalued market because remember as buffett says you don't need that many great stocks in your whole lifetime but three wonderful businesses is is more than it's more than you need in this life to do very well how many times have we heard that from buffett you don't need that many wonderful investments in your life to do very well so stay patient until the market eventually offers you one so that's the unfortunate reality of active investing in 2022 but there is another investing strategy out there that buffett frequently recommends for most people which is of course passive investing and for passive investors that are simply dollar cost averaging and participating in the stock market they should definitely continue to invest in 2022. the best single thing you could have done on march 11 1942 when i bought my first stock was just by an index fund and and and never look at a headline never think about stocks anymore just like you would do if you bought a farm you just buy the formula let the tenant farmer run it for you and i pointed out that if you'd put ten thousand dollars in an index fund that reinvested dividends and i paused for a moment to let the audience try and guess how much it amount to and it would come to 51 million dollars now i love that clip for the passive investor it isn't about trying to invest at the perfect times the nature of the dollar cost averaging strategy is that you continue to buy market tracking investments at the same time intervals rain hail or shine and by doing this over decades and decades you will get the average return of the market and by the way it's about eight to ten percent per year so i would pick a broad index but i wouldn't toss a chunk in at any one time i would do it over a period of time because the very nature of index funds is that you are saying i think america's business is going to do well over reasonably well over a long period of time but i don't know enough to pick the winners and i don't know enough to pick the winning times there's nothing wrong with that i don't know enough to pick the winning times occasionally i think i know enough to pick a winner but not very often and i certainly can't pick winners by going down through the whole list and saying this is a winner and this isn't and so on so the important thing to do if you have an overall feeling that businesses reasonable place to have your money over a long period of time is to invest over a long period of time and not make any bet implicitly by putting a big chunk in at a given time so for passive investors as warren was just saying don't worry that the market is high or low just keep on going never read a headline never look at a chart just follow your strategy have an ultra long term mindset and the stock market is your friend i mean even if you invested everything and the market crashed 50 tomorrow that's still not a disaster for long-term passive investors after the gfc literally the world's worst financial crisis since the great depression it only took five and a half years to be back where you were and nine years on the market has nearly tripled itself from that point so yes the market is high right now but that's not the end of the world as active investors we need to stay patient and not do anything silly and as passive investors we need to continue on as we always have just keep gunning for that average but next up what about inflation that's been a big story over the past 12 months and rightly so we're up to 6. 8 annual inflation in the us and it's looking likely that inflation will be a big story going into 2022 as well it's a it's a fascinating time we've never really seen what shoveling money in on the basis that we're doing it on a on a a fiscal basis while following a monetary policy of something close to zero interest rates and it is enormously pleasant but in economics there's one thing always to remember you could you can never do one thing you always have to say and then what that was warren speaking back in may 2021 before inflation had really taken off you can tell he saw inflation coming can't you it's exactly as buffett said you know in economics you can't just do one thing you have to ask and then what and what do you know the zero interest rates and the money printing finally caught up with us inflation is running hot so mr buffett what do we do about it well buffett's actually explained this one a long long time ago we're going back to 1982 a time where u.
s inflation was just cooling down after it had risen to about 20 percent in 1982 buffett wrote in his annual letter to shareholders exactly what sort of businesses we should be buying during inflationary periods he said quote such favored business must have two characteristics one an ability to increase prices rather easily even when product demand is flat and capacity is not fully utilized without fear of significant loss of either market share or unit volume and two an ability to accommodate large dollar volume increases in business often produced more by inflation than real growth with only minor additional investment of capital so number one he's talking about businesses that have an ability to increase prices and cop no consequences that definitely helps to counter the effects of inflation but what business could raise prices substantially and not lose market share surely people would look for some sort of cheaper product elsewhere well not if you have a moat not if you have a competitive advantage apple raises their prices higher than the competition all the time no consequences to their market share coca-cola raises their prices people don't switch to the other drinks and funnily enough they're two of warren buffett's biggest investments right now the single most important thing to do during periods of inflation is to ensure the companies you're looking at have a competitive advantage something that means they will keep their customers and thus their market share even if they raise prices and then secondly buffett says we need to look for businesses that can accommodate a large dollar volume increase in business with only minor additional investment of capital so essentially companies that are able to generate a lot more cash without needing to spend a lot to make that happen so this just means you need to look at the companies that have very scalable business models you know facebook doesn't need to build another app just to make more ad revenue they can just increase the frequency of their ads whereas if ford wants to make double their revenue they need to build new factories or hire more employees to make more cars that's a much harder task so in times of inflation look for that competitive advantage and also look for companies that are easily scalable and then lastly let's talk about interest rates the fed has announced they're thinking about three interest rate hikes in 2022 what does buffett have to say about interest rates interest rates you know basically are to uh to uh the value of assets what gravity is to matter you know essentially and and on thursday the u.
