Le marché boursier est conçu pour transférer de l'argent des actifs aux patients.

Le marché boursier est conçu pour transférer de l’argent des actifs aux patients.

Medine ACAR

Dans cet article Medine ACAR (ESSEC Business School, Programme Bachelor in Business Administration (BBA) – 2020-2024) commente une citation de Warren Buffett sur l’investissement à long terme.

« Le marché boursier est conçu pour transférer de l’argent des actifs aux patients. »

Warren Buffett suggère que le marché boursier favorise ceux qui adoptent une approche patiente et à long terme plutôt que ceux qui sont constamment actifs et réactifs. Cette perspective souligne l’importance de stratégies d’investissement basées sur une analyse approfondie et une vision à long terme, par opposition à des réactions rapides aux fluctuations du marché. Elle met en évidence l’idée que l’accumulation de richesse à travers le marché boursier est plus le résultat de décisions réfléchies et stables, plutôt que de transactions spéculatives fréquentes.

Qui est Warren Buffett ?

Warren Buffett, né en 1930, est l’un des investisseurs et figures financières les plus renommés du 20e et 21e siècles. Il est le président-directeur général de Berkshire Hathaway, une société de portefeuille multinationale.

Buffett est souvent surnommé “l’Oracle d’Omaha” pour son exceptionnelle compétence en investissement. Sa philosophie d’investissement met l’accent sur l’investissement de valeur à long terme, et il est connu pour son approche patiente du marché boursier.

Les lettres annuelles de Buffett aux actionnaires de Berkshire Hathaway et ses citations perspicaces sur l’investissement en font une source d’inspiration pour les investisseurs du monde entier. Il figure régulièrement parmi les personnes les plus riches du monde.

Concepts financiers liés à la citation

Investissement à Long Terme

La citation souligne l’importance d’un horizon d’investissement à long terme. Les investisseurs à long terme se concentrent sur la détention d’actifs pendant une période prolongée pour bénéficier de l’effet de composition et minimiser l’impact des fluctuations du marché à court terme.

Patience face à la Volatilité du Marché

Elle met en lumière l’importance de la patience pendant la volatilité du marché. Les investisseurs patients sont moins susceptibles de paniquer et de prendre des décisions impulsives pendant les turbulences du marché, ce qui peut conduire à de meilleurs résultats.

Investissement de Valeur

La philosophie d’investissement de Buffett est ancrée dans l’investissement de valeur, qui implique d’identifier des actions sous-évaluées avec de solides fondamentaux et de les conserver sur le long terme. Ce concept met l’accent sur l’importance d’analyser la valeur intrinsèque d’une entreprise plutôt que les mouvements de prix à court terme.

J’ai choisi cette citation car elle transmet succinctement l’essence d’une prise de décision financière prudente. Warren Buffett, l’un des investisseurs les plus prospères de tous les temps, a bâti sa fortune sur le principe de la réflexion à long terme et de la patience disciplinée. Dans un monde où beaucoup cherchent des gains rapides, cette citation sert de rappel que l’accumulation de richesse en finance nécessite souvent une main ferme et une volonté de supporter la volatilité à court terme pour des récompenses à long terme. C’est une leçon intemporelle qui peut profiter à la fois aux investisseurs chevronnés et aux nouveaux venus dans le monde de la finance.

Cette citation est importante car elle transmet la sagesse de Warren Buffett, un investisseur légendaire connu pour son approche d’investissement axée sur la valeur et le long terme. Pour quiconque s’intéresse à la finance, elle fournit des perspectives pratiques et des stratégies pour une construction durable de richesse, s’inspirant de l’expérience de l’un des investisseurs les plus réussis de l’histoire.

Autres articles sur le blog SimTrade

   ▶ All posts about Quotes

   ▶ Michel VERHASSELT Risk comes from not knowing what you are doing

   ▶ Federico DE ROSSI The Power of Patience: Warren Buffett’s Advice on Investing in the Stock Market

   ▶ Rayan AKKAWI Warren Buffet and his basket of eggs

   ▶ Youssef LOURAOUI Long-short equity strategy

   ▶ Akshit GUPTA Value investment strategy

   ▶ Henri VANDECASTEELE Approaches to investment

Ressources

Berkshire Hathaway’s 2022 Shareholder Letter

The Essays of Warren Buffett: Lessons for Corporate America

A propos de l’auteure

L’article a été rédigé en décembre 2023 par Medine ACAR (ESSEC Business School, Programme Bachelor in business administration (BBA) – 2020-2024).

Risk comes from not knowing what you are doing

Risk comes from not knowing what you are doing

Michel Henry VERHASSELT

In this article, Michel Henry VERHASSELT (ESSEC Business School – Master in Finance, 2023-2025) comments on a quote by Warren Buffet about risk.

“Risk comes from not knowing what you are doing”

Analysis of the quote

Warren Buffett’s quote, “Risk comes from not knowing what you are doing,” encapsulates a fundamental principle of investing and decision-making. It underscores the significance of knowledge, research, and informed decision-making in managing risk.

One key aspect of this quote is the idea that risk is not solely a result of the inherent uncertainty in investments or ventures. Rather, risk is often the consequence of making decisions without a comprehensive understanding of the situation. In the world of finance and investing, not knowing the intricacies of an investment or the market can lead to hasty, ill-informed choices that carry a higher level of risk.

Moreover, this quote stresses the importance of education and continuous learning in risk management. To minimize risk, individuals need to invest time and effort in gaining knowledge and expertise within their chosen domain. For investors, this means understanding the companies or assets they invest in, analysing financial statements, and staying informed about market trends.

In a broader context, this quote is not limited to finance; it applies to various aspects of life. In personal life just as in business, forgoing the careful analysis of the potential consequences of one’s actions can lead to very negative outcomes. Decisions made in haste, out of anger, excitement, disappointment, and other strong emotions generally tend to be mistakes. Patience and forethought tend to be rewarded.

In essence, Warren Buffett’s quote reminds us that risk is not an abstract force beyond our control. It is, to a significant extent, a product of our knowledge and decisions. By equipping ourselves with information, staying well-informed, and making deliberate choices, we can effectively manage and mitigate risk in both our financial and personal pursuits.

About the author

Warren Buffett is a renowned American investor and CEO of Berkshire Hathaway, known for his value investing approach and philanthropic efforts. His net worth consistently places him among the world’s wealthiest individuals. However, he is equally renowned for his commitment to philanthropy, pledging the majority of his fortune to charitable causes, primarily through the Bill & Melinda Gates Foundation. Buffett’s influence extends far beyond the financial world, making him a respected figure in both business and philanthropy. His life and career continue to inspire countless investors and entrepreneurs worldwide.

Financial concepts related to the quote

Risk management

Of course, the concept most directly related to the quote is risk management. That is perhaps the most fundamental concept of finance. We are dealing with unknowns, probabilities, and expectations. We must make sure that, through careful analysis, we eliminate as much downside potential as possible: that is the only way to guarantee long-term survival (and a fortiori, long-term success). This goal can only be achieved once a thorough understanding is reached of the assets and markets we invest in, and the people we invest or transact with. Without such an understanding, we create unnecessary risk and that will almost assuredly lead to financial losses sooner or later.

Due diligence

The quote underscores the significance of “knowing what you are doing”. In finance, we call this conducting due diligence. It involves comprehensive research and analysis before making any financial commitment. This includes examining a company’s financials, understanding market dynamics, and evaluating potential investments. Without proper due diligence, individuals may enter financial ventures blindly, exposing themselves to significant risks.

Portfolio diversification

One of the ways in which we mitigate risk is portfolio diversification. When we add assets to our portfolio, we want to reduce or eliminate the risk that comes with exposure to one specific investment, while keeping as much of the return as possible. The concept of beta directly stems from the idea of portfolio diversification. By sticking to a single asset, you are entirely and solely exposed to its volatility; by wholly diversifying your portfolio, you are theoretically reproducing the entire market, making your beta equal to 1, or in other words turning your risk exposure into the market risk. In conclusion, portfolio diversification is a fundamental strategy for risk mitigation in investment, and closely aligns with the quote’s meaning.

My opinion about this quote

In my opinion, Warren Buffett was talking about investing and not trading. However, as my experience and interests are closer to trading than investing, I see it as a useful quote within that context.

Firstly, let’s talk about stop-losses. They’re your safety net. You set them at a certain point where, if the trade goes sour, you bail out. But if you don’t know why you’re placing a stop-loss at a particular level, it’s like playing darts blindfolded. You might hit the target, but it’s mostly luck. Understanding the underlying reasons for your stop-losses is crucial. It’s not just a random number; it’s based on your analysis.

Managing position size is another important element to consider. If you don’t know what you’re doing, you might risk your entire account on a single, promising, trade, much like going all-in on a hand of poker simply because you were dealt a pair of aces. Position sizing is about controlling risk. You need to understand how much you can afford to lose and then adjust your position size accordingly. If you don’t, you’re setting yourself up for potential disaster. It’s important to remember you never know the market, you simply might sometimes guess better than others. Outside of arbitrage or insider trading, certainty does not exist in trading; hence, position size should always be managed intelligently.

Hedging is also related to this quote. A hedge is a plan B. If you are long on a stock, and you are not certain which direction the market will take, you can reduce your risk by creating another position with options or other derivatives. But, if you don’t know how these instruments work or why you’re using them, it’s like having a spare tire but not knowing how to change it. You might end up with two flat tires instead of one.

Lastly, getting an edge on the market. Ultimately this is what every trader claims to be able to do. It boils down, almost entirely, to risk management. You must know your strategy inside out, and you must know exactly what you plan to do if you don’t get this expected edge out of your trade. In this way, over the long run, you can have either a majority of winning trades of equal sizes, or winning trades that outweigh the losing ones in terms of net gain. To have an edge, you need to understand why your approach works, when it might not, and continuously adapt.

In short, in trading and more generally in finance, ignorance isn’t bliss; it’s a one-way ticket to risk.

Why should I be interested in this post?

A finance student should be interested in this post because risk is the single most important concept to understand both in finance and in business. In this post, I believe I have made this concept compelling for students by going beyond theory. My post is also practical. It talks about real-world applications like setting stop-losses, managing position size, and hedging with financial products. These are the tools used daily by finance professionals in capital markets.

Furthermore, finance is all about making sound decisions, and you can’t do that effectively without understanding how to control and mitigate risk. What’s even more interesting is that it clarifies a common misconception. It tells you that gaining an edge in the financial market isn’t about having secret knowledge. It’s understanding your approach and the markets you’re dealing with. Being aware of the importance of risk management is therefore crucial for a wide range of careers and that is why a finance student should take an interest in it.

Related posts on the SimTrade blog

   ▶ All posts about Quotes

   ▶ Federico DE ROSSI The Power of Patience: Warren Buffett’s Advice on Investing in the Stock Market

   ▶ Rayan AKKAWI Warren Buffet and his basket of eggs

   ▶ Jianen HUANG It’s not whether you’re right or wrong

   ▶ Clara PINTO Investment is a flighty bird which needs to be controlled

Useful resources

Are Stop-Losses Necessary?

Diversifying your portfolio with a lower net worth

Sharpe’s classic 1964 article on CAPM

About the author

The article was written in December 2023 by Michel Henry VERHASSELT (ESSEC Business School – Master in Finance, 2023-2025).

The Power of Patience: Warren Buffett's Advice on Investing in the Stock Market

The Power of Patience: Warren Buffett’s Advice on Investing in the Stock Market

Federico De ROSSI

In this article, Federico De ROSSI (ESSEC Business School, Master in Strategy and Management of International Business, 2020-2023) comments on a quote by Warren Buffet about patience.

Quote

The stock market is a device for transferring money from the impatient to the patient.

Analysis of the quote

The quote “The stock market is a device for transferring money from the impatient to the patient” was written by none other than Warren Buffett, widely regarded as one of the greatest investors of all time. Buffett is the chairman and CEO of Berkshire Hathaway, a multinational conglomerate holding company with a diverse portfolio of businesses in insurance, energy, railroads, manufacturing, and retail. As of the 2nd of March 2023, the oracle of Omaha has amassed a net worth of more than $100 billion over the course of his career, owing largely to his astute stock market investments. Buffett’s investment philosophy revolves around identifying high-quality companies with strong competitive advantages and investing in them for the long term, often with a holding period of 10 years or even more. A strategy also known as value investing.

Financial concepts related to the quote

Related to this quote, I spotted three main financial concepts: compounding returns, long-term investment strategy, and risk and reward.

Compounding returns

One of the financial concepts associated with Buffett’s quote is the idea of compounding returns. Essentially, the longer you hold onto a stock, the more money you stand to make. By reinvesting your earnings and letting them compound over time, you can potentially turn a small initial investment into a large sum of money over the course of several years or even decades. This is where patience comes in – if you’re constantly buying and selling stocks, you’re unlikely to see the full benefits of compounding returns.

Long-term investment strategy

Another concept that ties into Buffett’s quote is the importance of having a long-term investment strategy. The stock market can be incredibly volatile in the short-term, with prices fluctuating wildly based on a variety of factors such as news events, economic data, and investor sentiment. However, over the long-term, the stock market tends to follow a generally upward trend, as companies grow and earnings increase. By having a long-term investment strategy and holding onto your stocks through market fluctuations, you can avoid making rash decisions based on short-term movements and instead focus on the bigger picture.

Risk and reward

A third financial concept related to Buffett’s quote is the idea of risk and reward. The higher the potential reward, the higher the level of risk involved. Stocks with high growth potential may offer greater returns, but they also come with greater risk of volatility and price fluctuations. On the other hand, more stable, established companies may offer lower returns but come with lower risk. By being patient and willing to wait for your investments to pay off over the long-term, you can potentially reap the rewards of higher returns while minimizing your risk.

My opinion about this quote

In my opinion, Buffett’s quote is a testament to the power of patience and long-term thinking when it comes to investing. Too often, people are tempted to make quick, impulsive decisions based on short-term market movements or the latest hot stock tip. However, this approach rarely leads to long-term success. Instead, by taking a patient, disciplined approach to investing and focusing on high-quality companies with strong fundamentals, you can potentially build wealth over the course of years or even decades. While investing in the stock market always involves some level of risk, by being patient and letting your investments compound over time, you can potentially reap the rewards of higher returns and build a more secure financial future.

Why should I be interested in this post?

This quote is a great reminder to always invest money with your brain and not based on your emotions. Be patient – fools rush in where angels fear to tread.

Related posts on the SimTrade blog

   ▶ All posts about Quotes

   ▶ Akshit GUPTA Warren Buffett – The Oracle of Omaha

   ▶ Youssef LOURAOUI Long-short equity strategy

   ▶ Rayan AKKAWI Warren Buffet and his basket of eggs

   ▶ Youssef EL QAMCAOUI The Warren Buffett Indicator

Useful resources

Berkshire Hathaway

About the author

The article was written in March 2023 by Federico De ROSSI (ESSEC Business School, Master in Strategy and Management of International Business, 2020-2023).

Warren Buffet and his basket of eggs

Warren Buffet and his basket of eggs

Rayan AKKAWI

In this article, Rayan AKKAWI (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022) analyzes the two following quotes “Do not put all eggs in one basket” and “Put all your eggs in one basket and watch that basket” often used by Warren Buffet to describe his investment strategy.

“Do not put all eggs in one basket”

I particularly liked this quote first because it is said by the world’s greatest investor and one of the richest people on the planet, Warren Buffet. I aspire this man due to his great investment philosophy which is to invest in great businesses at value for money prices and then by using the “buy and hold strategy” keep the stocks over the long term. He has bought great brands such as Coca Cola, Microsoft, and American Express. Second, I like this quote particularly because it is dedicated to any person who has little or no knowledge in investment, so it is easy to implement.

Analysis

If we analyze the wealthiest people in the world, they are entrepreneurs who have created companies that grew exponentially in value. For example, Bill gates who is the founder of Microsoft (1975), Jeff Bezos who is the founder of Amazon (1994), and Mark Zuckerberg who is the founder of Facebook (2004). And as we continue to analyze these founders, we come to realize that they have made their wealth by putting all their eggs in one basket at least early in their lives. However, not all of us have this entrepreneurial spirit and business success such as these brilliant men. Thus, when Warren Buffet said “do not put all eggs in one basket” he was referring to an average person who has little knowledge in investments. Therefore, he advocates investment into index tracker or passive funds which have the benefit of low charges, better performance, and large diversification than most active managed funds. This involves a buy and hold strategy which keeps share dealing charges low. Thus, it is always recommended to have 80% of investments in passive funds which are low cost, predictable, and conservative funds and 20% of investments in satellite which usually involve higher charges with greater volatility and greater returns.

Another way of looking at it is the following. One might decide to invest a certain number of personal wealth in a new business or in crypto. This would be a risky type of investment because another competitor might release a better and more attractive or even more affordable version of the product or service. Eventually, this might put you out of business if a customer writes a bad review of your product or business or if the bitcoin value drops.

So before you invest more time and money in your business, consider how you can manage your risk. First, you must think about your risk tolerance which depends on your age and current financial obligations. Second, you need to keep sufficient liquidity in your portfolio by setting aside an emergency fund that should be equal to 6 to 8 months’ expenses. For ensuring that there is easy accessibility to emergency funds, you should have low-risk investment options like Liquid Funds and Overnight Funds in your accounts. Then you need to determine an asset allocation strategy that works which refers to investing in more than one asset class for reducing the investment risks and this strategy also provides you with optimal returns. You can invest in a perfect mix of key asset classes like Equity, Debt, Mutual Funds, real estate, etc. One of the asset allocation strategies is to invest in a combination of asset classes that are inversely correlated to each other. After you have found the best mix of asset classes for your portfolio, you can reduce the overall investment risk by diversifying your investment in the same asset class. Think about diversifying by offering more than one product or service. To avoid liquidity risk, it is always better to stay invested in blue chip stock or fund. Investors should check the credit rating of debt securities to avoid default risk.

“Put all your eggs in one basket and watch that basket”

At the same time, Warren Buffet believes that diversification makes little sense if a person doesn’t know exactly what he or she is doing. Diversification is a protection against ignorance and is for people who do not know how to analyze businesses. Sometimes it is enough to invest in two or three companies that are resistant to competition rather than fifty average companies due to less risk. That is why it is as critical for a person to invest in a company where its values and vision are similar to that of the investor and to be able to watch closely the performance of that business and its stocks.

Thus, Warren Buffet believes that it is extremely crucial to be able to “watch your basket” or your stocks closely to better understand the stock market. For example, when the stock market is going down, it is the best way to start buying stocks because businesses will be selling at a discount.

Why should I be interested in this post?

One would be interested to read this post because it introduces the basics of investing in stock markets for an average person who has little knowledge in investments or for a student studying business. As a student, it is crucial and important to be able to have at least a general idea of the basic rules of investments and especially those stated by one of the most famous investors in the world such as Mr. Warren Buffet. Whether you are interested in buying stocks yourself or whether you are not, as a business student, you might be asked about investments and the financial market one time in your life and knowing some useful information about investments will be impressive for you. It will allow you to understand the bigger picture of financial markets, give some recommendations for your family and friends, and help you invest yourself in the safest and most successful way.

Related posts on the SimTrade blog

   ▶ Youssef LOURAOUI Portfolio

   ▶ Youssef LOURAOUI Passive Investing

   ▶ Youssef LOURAOUI Active Investing

   ▶ Youssef EL QAMCAOUI The Warren Buffett Indicator

Useful resources

Berkshire Hathaway

About the author

The article was written in May 2022 by Rayan AKKAWI (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2022).