In a recent interview, Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) chairman and CEO Warren Buffett talked on a number of ideas that should guide investors' thinking on individual wealth. The 83-year-old investor is worth around US$60 billion, so he knows what he is talking about.
One thing is we shouldn't feel bad when stocks go down. If your stock is a quality stock, and growing as you expected, you may want to see it dip down to buy more at a discount.
Next, you don't need to be an expert in many companies to know which investments are good. He said you just need some conviction that a company is "…likely to make more money five or 10 or 20 years from now than they're earning now."
Thirdly, don't chase after quick profits. He stresses thinking of yourself as the owner of the whole company, not just a stock. If you had a successful business, you wouldn't sell it. You'd want to grow it even more.
Looking for a quick profit may be ok for some. However, they will miss out on fantastic companies that could double in share price many times over the years.
Here are two stocks that are examples of this sage advice.
REA Group Limited (ASX: REA), the owner of realestate.com.au, has risen in share price over 60 times since 2004. During the GFC, it fell from about $7 to as low as $3.
For those who sold out or didn't buy in at that time, they missed a great opportunity as it recovered and climbed to its current $49.00.
Many people who used the website for property searches could have seen the popularity of it without being financial experts. The annual reports would have informed them of the rising earnings.
CSL Limited (ASX: CSL), the biopharmaceutical company, develops medical products for blood disorders and viral and bacterial diseases. Patient investors over the past 10 years saw the share price rise seven times.
During 2008 and 2011, the share priced traded mostly in a $30-$40 range. Since then it has gone up to $71.70 due to growing earnings. Investors could have seen the increasing revenues and high profit margins year by year, and realised it was a winning company even if they didn't have a medical background.
Foolish takeaway
If the stock stories of these companies stay the same or improve, and they keep growing earnings, they have the opportunity to advance in price.
Occasionally, individual companies can stumble, or the stock market can have a big correction. Lower share prices could turn out to be a chance to buy your favourite stocks at a discount.
