Warren Buffett is renowned for his stock market insights, but his 2014 Fortune article highlights the valuable lessons we can learn from his real estate investments. While we usually associate Buffett with stocks, his approach to real estate echoes key principles that can guide long-term investors.
Here’s Warren Buffett on His Real Estate Investments:
“My two purchases were made in 1986 (a Nebraska farm) and 1993 (a NYC retail property). What the economy, interest rates, or the stock market might do in the years immediately following — 1987 and 1994 — was of no importance to me in determining the success of those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.
There is one major difference between my two small (real estate) investments and an investment in stocks. Stocks provide you minute-to-minute valuations for your holdings, whereas I have yet to see a quotation for either my farm or the New York real estate.
It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings — and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his — and those prices varied widely over short periods of time depending on his mental state — how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.
Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits — and, worse yet, important to consider acting upon their comments.
Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of “Don’t just sit there — do something.” For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.
A “flash crash” or some other extreme market fluctuation can’t hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy.
During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group they were certain to do well.”
Key takeaways from Buffett’s strategy:
1. Focus on Fundamentals, Not Market Noise
Buffett compares real estate investments to Benjamin Graham’s “Mr. Market” analogy, emphasising that market fluctuations should not dictate your decisions.
2. Opportunities Lie in Market Downturns
History shows that every market dip presents a chance to invest in quality assets at a discount.
3. Stay Disciplined During Uncertainty
Emotional reactions to market volatility can be costly. Instead, think long-term and make decisions based on intrinsic value.
As we navigate uncertain times, remember Buffett’s approach: he views declines as opportunities and sticks to his principles, even when the market gets unpredictable.
What would Buffett do? He’d be buying.
Ready to build a resilient, long-term investment strategy? Contact the experts at Oreana Private Wealth today and let us help you achieve your financial goals.
