Famed investor Warren Buffett, or the “Oracle of Omaha” as some know him, is a legend of the stock market and still relevant today. His holding company Berkshire Hathaway is one of the world’s largest companies.
If you look closely at Berkshire, you will see tons of companies, some of which he’s held for decades without selling. It’s a drastic difference from what you see from talking heads on TV, who are always talking about the “hot trade” of the week.
So what can you learn from Warren Buffett that will help you make more money in the market? Here are three benefits of adopting Buffett’s long-term buy-and-hold approach to stocks.
Pay less in taxes
Taxes can be the silent killer of investment returns. When you sell any asset (for example stocks), your profit is called a capital gain. Of course, most governments will ask for a piece of that profit with a capital gains tax.
In the United States, capital gains are taxed differently depending on how long you hold a stock. Profits on stocks held less than one year, or short-term capital gains, get taxed like ordinary income.
Now, if you did well on a sale and made a sizable profit, these gains could be hit with a higher tax rate if they bump your total income into a higher tax bracket — as high as 37% in the United States.
Profits from a stock held longer than one year, or long-term capital gains, get taxed at a lower rate, between 0% and 20% depending on your income tax bracket. This can mean paying thousands less in taxes on a large sale. In other words, the IRS rewards long-term investors, so don’t look a gift horse in the mouth!
Fundamentals and patience create less stress
The stock market has been called a “casino” by some, probably for the irrational volatility that takes place daily. Many things can move stock prices in the short term; look at how up and down growth stocks have been over the past six months! There’s always a news headline, government statistic, or geopolitical event that can make the markets go up or down. It’s almost curious why so many people try to “outsmart” the market when it’s so random.
Meanwhile, a company’s fundamentals tend to drive the stock price over a multi-year time frame. If you own a growing and profitable business with competitive advantages, the market will usually sniff it out at some point and reward it with a higher price.
You may have the next Amazon, but even that stock went from $100 to $10 in the early 2000s. Was Amazon a healthy business one year and nearing bankruptcy the next? Nope, just the market being irrational like it does from time to time. The lesson? Focus on fundamentals and give businesses time to show their stuff. Everything in the near term is more a guess than anything.
You won’t trip on your own feet
Lastly, Warren Buffett doesn’t try to be smarter than he has to be. Great stocks are hard to find, and Buffett doesn’t make it complicated when he finds one; he holds it until it’s not great anymore. That’s why some stocks have been staples of Berkshire Hathaway for decades.
He might tell you himself that his biggest mistake involved trying to do too much. He sold Walt Disney twice, which cost him as much as $31 billion in potential gains.
The broader data supports what Warren Buffett found out for himself: The more you trade, the worse your investment returns tend to be. Sometimes there are good reasons to sell; a failed investment thesis or unethical management are great reasons to get out of an investment. However, when investors try to be the most intelligent people in the room, it often backfires.
The ten-second takeaway
There’s so much to learn from Warren Buffett and his long career. His long-term investing strategy is a simple compass that retail investors can follow and benefit from.
It’s not easy dealing with the volatility of stocks, and finding great investments is like finding a needle in a haystack. But you can make it easier on yourself by borrowing some wisdom from the Oracle’s success. Find winners, hold onto them, and let them do most of the heavy lifting in your wealth-building journey.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool owns and recommends Amazon, Berkshire Hathaway (B shares), and Walt Disney. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long January 2024 $145 calls on Walt Disney, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.