Warren Buffett is a multi-billionaire and a very smart man who has built much of his fortune through market investments that did not follow conventional wisdom. He calls most investors “lemmings”: people who do what everybody else is doing—buying a particular stock, selling a particular stock, diversifying into dozens of companies—because everybody else is doing it.
His philosophy? “We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful.”
Warren Buffett follows a different drummer and makes vastly more money than the lemmings.
Here are five basic contrarian rules to invest by and some Buffett words of wisdom to go with them:
- Stick With What You Know. Wall Street analysts may tout a high-tech company, or a major conglomerate, or a company helping to found a brand new industry, but that doesn’t mean you should buy that stock. “Never invest in a business you can’t understand,” says Warren Buffett.
- Put Your Money Where Your Values Are. Fossil fuel companies like ExxonMobil continue to rack up record profits and pay healthy dividends, but if you’re someone concerned about global climate change, investing in ExxonMobil would be tantamount to funding global warming. Instead, advises Warren Buffett, “Why not invest your assets in the companies you really like? As Mae West said, ‘Too much of a good thing can be wonderful.’” Also, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
- Invest in a Few Great Companies at a Fair Price. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” More is not better. “Wide diversification is only required when investors do not understand what they are doing,” says Buffett.
- Focus on Value, Not Share Price. “The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price. . . . Focus on return on equity, not earnings per share.”
- Don’t Jump at Every Blip on the Stock Market. “Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell. . . . Lethargy, bordering on sloth, should remain the cornerstone of an investment style.”
The contrarian rules of investing are really about sticking to the fundamentals. Do your research; look for companies that have a great and unique product or service, a great potential market, great management team, great predictability, and a strong annual growth rate; invest in companies that you understand and would be proud to own; and focus on value over the long-term.
When it comes to contrarian investing, says Warren Buffett, “you are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”