When Berkshire Hathaway CEO Warren Buffett makes investing decisions, he focuses on one thing only: the facts.
“You have to be able to play out your hand under all circumstances,” Buffett told shareholders in 2006. “But if you can play out your hand, and you’ve got the right facts, and you reason by yourself, and you let the market serve you and not instruct you, you can’t miss.”
Your opinions and emotions aren’t likely to help you. “Being contrarian has no special virtue over being a trend follower,” Buffett says. Instead, the Oracle of Omaha suggests taking a pragmatic approach to investing decisions. First, gather all of your facts. Next, learn how to dissect them to find the pertinent information you need to make your decision. For Buffett, that means looking for the pieces that are “important and knowable.”
“If something’s important but unknowable, forget it,” he says. “I mean, it may be important whether somebody’s going to drop a nuclear weapon tomorrow, but it’s unknowable.”
Focus on the variables that you do have at your disposal. Once you’ve narrowed down your information, “then you decide whether you have information of sufficient value that — compared to price and all that — will cause you to act,” Buffett explains.
Whether or not you choose to invest in something should be based on your research, not on your reaction to what other people are doing and saying. As Buffett puts it, “what others are doing means nothing.”
That’s why Buffett recommends doing your homework beforehand and investing in solid companies that will last, rather than trying to time the market or react to your anxieties. Concentrate on the facts, not how you’re feeling.
“Don’t watch the market closely,” he told CNBC in 2016 amid wild fluctuations. “If they’re trying to buy and sell stocks, and worry when they go down a little bit … and think they should maybe sell them when they go up, they’re not going to have very good results.”
Fellow billionaire Ray Dalio agrees. Though it’s tempting to sell when the market begins to drop, he says, giving in to your fear is not a sound strategy.
“You can not possibly succeed that way,” Dalio said at the Harvard Kennedy School’s Institute of Politics. “You’ve got to do the opposite. It’s when you’re not scared you probably want to sell, and when you are scared, you probably want to buy.”
Even when the market it tumultuous, it’s helpful to tune out other investors and concentrate on what you know.
“You’re right because your facts and reasoning are right,” Buffett told shareholders. “So all you do is you try to make sure that the facts you have are correct. And that’s usually pretty easy to do in this country. I mean, information is available on all kinds of things. Internet makes it even easier.”