10 Lessons of Sanity From Warren Buffett During Insane Markets

Buffett might not always follow his own rules to the tee, but he seems to end up being right more often than not. Maybe using rules-based investing decisions should be a good start investing sanely during periods of insanity in the markets.

2. Taking Advantage of Business 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. Now Berkshire Hathaway has bought Amazon shares in 2019.

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. Buffett had avoided airlines for a half-century or so too, but now he and his team own close to $10 billion worth of airline shares.

3. Knowing How Taxes on Gains, Losses, Dividends and Interest Work

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 want to buy. Buffett had five big positions in which 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.

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. When it comes to big sell-offs, sometimes big losses can be locked in as a means of protecting against paying a big tax bill on other gains.

4. Keeping a Basket of Great Businesses

Buffett has sounded as though he’s on autopilot in some interviews, with variations of him saying “America’s best days are ahead of it.” Still, his investment themes have done better than most investors have done. 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.”

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 investors would call that extreme diversification.

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