10 Lessons of Sanity From Warren Buffett During Insane Markets

2. Taking Advantage of Business Model Changes

Buffett gave a good sharp reminder to admit that sometimes the investment thesis can change within a company. This was the case in May of 2017 when it was first revealed that Buffett had started selling out a large portion of his stake in International Business Machines Inc. (NYSE: IBM). Buffett even said he didn’t sell because of earnings disappointments but because he did not value IBM the same way he did six years earlier.

It is also the case, one that in hindsight Buffett should have avoided, but during the retail plummet of 2016 and early 2017, Buffett decided that the Inc. (NASDAQ: AMZN) death star was big enough that he rethought his investment in Walmart Inc. (NYSE: WMT) — and the pressure of Jeff Bezos made him dump the mighty Walmart.

Rethinking an investment thesis also allowed Buffett to finally decide to buy into Apple Inc. (NASDAQ: AAPL) in the first half of 2016 after Apple shares had lost one-fourth of their value from a year earlier.

3. Understanding How Taxes on Gains and Losses Impact Over Time

Sometimes it can be very tempting to lock in big gains in stocks that may seem less attractive today than they did a year ago, five years ago or even more than a decade ago. The problem with selling big gainers is that the taxes have to be considered for whatever else you might be wanting to buy. Buffett had five big positions where the profits were north of $10 billion each back in 2017, but whatever tax rate has to be paid implies that a new position as a replacement has to be undervalued by that same amount for it to make sense. Otherwise, the sale isn’t a wash sale per the IRS rules but it may in effect be a wash to the investor.

And on taxes, there is a reason that most investors should look at opportunities for long-term gains rather than short-term ones: you get the long-term capital gains treatment in taxes and not taxed at your income tax rate.

4. Keeping a Basket of Great Businesses

Buffett sometimes sounds like a puppet when he is quoted on variations of “America’s best days are ahead of it.” That being said, his investment themes have done better than most investors’, and he is considered to be among the best modern-day investors of them all. Buffett’s 2016 annual report outlined how good businesses should be viewed as a whole basket rather than just based on the market sentiment of a day, week or even longer when times are tough: “American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that.”

And on keeping a great basket of businesses, it is not uncommon for Buffett and Berkshire Hathaway to own stakes in 50 or more companies at a given time. Some of us call that diversification.

5. You Can Change Your Mind and Outlook

It’s okay to change your opinion of something even after years of dislike. This can be applied to sectors, stocks or even the market in times of extremity. Buffett personally would not have ever invested in the airline industry for many years. A multi-billion airline bet was made by one of Buffett’s top new investment team members (Weschler/Coombs). But then the airlines had finally consolidated into a few companies with defendable moats, with major pricing power on tickets, reliably low jet fuel prices and even the power to start gouging customers on fees and policies.

Buffett had in the past referred to the airline industry a death trap, and Buffett had even gone as far in prior years to say that the best airline bet would have been to shoot the Wright brothers down. After the portfolio managers bought the major airlines, Buffett even ordered that Berkshire Hathaway should buy into Southwest Airlines Co. (NYSE: LUV), as Buffett told CNBC that he didn’t want Herb Kelleher thinking he did not favor Southwest out of the other legacy carriers.

It’s okay to change your mind about industries and sectors over time, and that needs to be considered if the prices of certain companies or sectors become too cheap during a market sell-off. Buffett has also rotated in and out of energy sector shares so many times that he obviously changes his mind about the future of oil and gas too.

6. Avoiding Bubble Areas

It’s okay to think an asset can be in a bubble, even if you missed the big run higher. Some modern and classic investors fight over how to view bitcoin, but bitcoin’s meteoric rise from under $1,000 to almost $20,000 has seen the cryptocurrency then lose over 60% of its value in a very short time. It’s easy to argue that Buffett (and most of the rest of us) missed the great bitcoin bubble inflating. He started calling bitcoin a mirage back in 2014.

If an investment or a financial class is too hard to understand or if you just cannot agree on how sound the fundamentals are. then it’s fine to keep away and look elsewhere for how you should invest within your risk tolerance. Buffett does not chase bubbles in technology or other areas of the stock market. This may have come with a lot of opportunity costs, but he likes to stick with what he can easily understand.

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