Buying a farm and investing in the stock market may not be that different after all.
The legendary investor Warren Buffett — dubbed the Oracle of Omaha — made the analogy during Berkshire Hathaway’s annual shareholder meeting explaining the advantage of stocks.
“Imagine for a moment that you decided to invest money now and you bought a farm,” said Buffett, the chairman and CEO Berkshire Hathaway. “Let's say you bought 160 acres...and the farmer next to you had 160 identical acres, same contour, same soil quality.”
Now, imagine that the farmer who has the same farm as yours makes you an offer every day to either sell his farm to you or buy yours, he continued.
“That's a very obliging neighbor,” Buffett said.
This pricing advantage is something you don’t get with farms, but you get with stocks, according to Buffett.
Buying stocks — like buying a farm — means you’re buying into a business. But with stocks, you have an added advantage of having that neighbor — or other investors — giving you a price for your farm every day.
“The only thing you have to do is remember that this guy next door is there to serve you and not to instruct you,” Buffett said. “You bought the farm because you thought the farm had the potential. You don’t need a quote on it.”
‘Stocks have an enormous advantage’
Many people may see a disadvantage in being constantly offered a price for your stock — or a farm — and many people may profit from telling you they can predict what the farmer will offer tomorrow or next week.
But you don’t have to listen to them, Buffett said, especially now.
If you owned a business that you liked before the coronavirus pandemic, nobody's forcing you to sell even with changing prices.
“If you really like the business and you like the management, and the business hasn't fundamentally changed,” Buffett said, “the stocks have an enormous advantage. You still can bet on America.”
The American tale, as Buffett calls it, may have interruptions, many of which you're not going to foresee.
So if you had that farm, and your neighbor offered you $2,000 an acre on Monday, $1,200 an acre the next day, and maybe then $800 an acre the day after, that shouldn’t change your evaluation of the farm’s potential.
“Are you going to let this guy drive you into thinking: ‘I better sell because this number keeps coming in lower all the time?’” he said.
Bringing the right psychological approach to owning common stocks is important: Betting on that farm may be better than listening to the neighboring farmer.
“If you bet on America and sustain that position for decades, you’re going to do far better than owning Treasury securities,” Buffett said, “or far better than following people who tell you what the farmer is going to yell out next.”
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