In 2023 Plan To Heed The Wisdom Of Warren Buffett When Investing In ASX Shares

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The Australian share market experienced a tumultuous year in 2022, resulting in numerous ASX shares suffering heavy losses over 12 months.

While this may be disheartening news for investors, it also created an ideal buying opportunity. Before impulsively investing, investors should heed Warren Buffett’s insight on buying discounted stocks.

In his 1989 letter to Berkshire Hathaway investors, Warren Buffett cautioned against investing in terrible companies even if it promised a quick gain.

“If you buy a stock at a sufficiently low price, there will usually be some hiccup in the business’s fortunes that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the “cigar butt” approach to investing. A cigar butt on the street with only one puff left in it may not offer much of a smoke, but the “bargain purchase” will make that puff all profit.” Warren Buffett said.

Rather than take part in cigar butt investing, Warren Buffett has advised investors to make long-term investments in exceptional companies instead.

Unless you are a liquidator, that kind of approach to buying businesses is foolish. First, the original “bargain” price will probably not be such a steal after all. In a difficult business, no sooner is one problem solved than another surface – never is there just one cockroach in the kitchen.”

“Second, any initial advantage you secure will be quickly eroded by the low return the business earns. For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realize a high return,” he continued. 

“But the investment will disappoint if the business is sold for $10 million in ten years and, in the interim, has earned and distributed only a few per cent on cost annually. Time is the friend of the wonderful business, the enemy of the mediocre.” Warren Buffett added. Ready to take the next step towards finding successful cornerstone companies? Then, read Scott Phillips’ ‘Starter Stocks’ report for all the necessary information.

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