The fundamental idea of investing is simple: earn the highest possible return on your investment. In theory, this concept holds true, but people’s investing strategies have evolved dramatically in recent years with the adoption of new technologies. Today, people have access to day trading platforms, cryptocurrencies, and many alternatives to traditional investing tools like stocks and bonds. The rise of quick investment transactions, buying crypto for a month and then selling it, for example, has become mainstream and accessible to anyone.
I recently read a book titled The Psychology of Money by Morgan Housel. It was a fantastic read that clearly lays out valuable lessons about investing. Many of these lessons revolve around people’s perception of money, how to be responsible with money, and, perhaps most importantly, how to be patient with money. Famous investor Warren Buffett is often used as an example within this book because his success exemplifies many of Housel’s lessons. Being patient with money is incredibly important, so much so that it can change your life.
Warren Buffett started investing at a very young age and continued to do so for decades. Many argue that Buffett’s success came from getting lucky with certain stocks, but in reality, he was simply a knowledgeable and disciplined investor. His knowledge stemmed from years of experience. He started investing his money at 11 years old, navigating economic booms and market failures throughout his financial journey. Buffett learned to manage his money in different market conditions. While he credits a portion of his success to luck, as no one truly knows how the market will change, he also attributes it to his faith in the economy. His investments survived tremendous economic downturns, including the 1982 recession, the 2008 market collapse, and the COVID-19 recession.
The question is: how has Buffett been able to find success during times of economic hardship?
A large part of a stock’s success is based on mass psychology, specifically people’s perception of a company. If people believe in a company or are confident in what it is doing, they invest money, driving up the price per share, which then reflects the company’s success. On the other hand, bad news, whether it’s a scandal or poor market performance, can cause investors to pull their money, decreasing the stock price. During recessions, it’s common for investors to liquidate their money out of fear of the market crashing and losing everything. Recessions are stressful and uncertain times for everyone. However, based on economic trends over decades, the market has always, and likely will always, continue on an upward trajectory despite temporary deviations.
The key is to invest carefully and wisely. Focus on stable, consistent, and “recession-proof” companies or sectors. These are businesses that are so essential to human life that they will continue operating during a recession or those with strong financial foundations that enable them to withstand economic downturns. This is exactly what Buffett did. He never withdrew his investments during his many years of investing, even through multiple economic implosions. Famous French military general Napoleon once described a war genius as “the man who can do the average thing when all those around him are going crazy.” During these tumultuous times, when millions of people were liquidating their investments, Buffett, the investing genius, remained patient. He allowed his investments to compound and grow over time, even if that growth was slow during hard times.
The power of compounding is astonishing. Had Buffett liquidated his investments during those recessions, his financial success might never have reached the level it has today.
New investing trends are undoubtedly lucrative. Who wouldn’t want to earn a 50% return on an investment in a matter of days, or even minutes? But such rewards come with high risks and volatility, terms that a conservative investor tries to avoid. The ultimate goal of investing is to preserve your wealth and grow it exponentially over time, as Warren Buffett and many other successful investors have done. That is why it is important to invest in stable companies, be patient, and let the market do the work for you.
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