Buffett, Lynch and Graham – how to invest like the best during uncertainty

It’s been a rollercoaster ride for more than just markets over the past few years, leading to lots of unpredictability and uncertainty. And things don’t seem to be slowing down either.

The Ukraine crisis is a tragedy most of us won’t have been ready for, and the main concern around the globe will be for anyone impacted. It’s a devastating turn of events for citizens who were hoping for a diplomatic resolution.

Many have seen the impact the crisis has had on markets over the past few days and are aware of the effect it will have on further inflationary spikes. It’s a fast-moving situation, so there’ll likely be more ups and downs to come.

Read our latest update on the Ukraine crisis

If history has taught us anything, it’s the resilience of markets in times of crisis over the long term. No matter what happens, good investing principles stay the same. So, while you can’t always control how your investments perform, you can control how you prepare your portfolio.

We’ve looked at three of the most successful investors of all time, to see what they can teach us about preparing for these uncertain times.

Warren Buffett

Warren Buffett is considered one of the most successful investors of all time. Buffett is currently the 8th richest person in the world, and has successfully run Berkshire Hathaway, a holding company for a variety of businesses, for over 50 years. With such an impressive biography, he certainly has some words of wisdom we can take on board.

“Be fearful when others are greedy and be greedy when others are fearful”.

Share prices and the stock market can overreact in the short term. Investors’ emotions can come to the fore and share prices can move away from what the company’s really worth. The difference between price and value is essential for investors.

When markets seem to be taking a turn for the worst, it’s essential to hold your nerve and think long term.

Of course, we need to watch out for the opposite too. When investors get carried away, prices can rise to unsustainable levels – like we saw in the dotcom bubble of the late 90s. This is when Buffett tells us to be fearful.

Remember though, all investments can fall as well as rise in value, so you could get back less than you invest.

Two common investing mistakes to avoid

Highs and lows in a market are nothing unusual. Buffett believes if you’re looking to add to your portfolio, falling share prices could offer opportunity.

History has shown that buying when valuations are cheap can push the odds in an investor’s favour and yield a greater chance of profit, but there are of course no guarantees.

Benjamin Graham

Born in London in 1894, Graham taught at Columbia Business School during the Great Depression, counting one Warren Buffett among his students. He also ran his own investment partnership, reportedly achieving an average annual return of over 20%.

As well as being a big believer in diversification, Graham had a critical view of overvalued ‘growth’ stocks. Not because these companies can never deliver a good investment return, lots do, but because if anything goes wrong, the risk to the money you initially invested is substantial.

When inflation and interest rates are on the up, highly valued growth companies can fall out of favour. These are companies that could have the potential to grow over the long term, like exciting new tech trends.

The opposite are companies that seem to be undervalued – where the company’s assets or profits aren’t fully reflected in the share price. The hope is that in the future others realise their value, which is later reflected in the share price, although there are no guarantees.

But that doesn’t mean you can’t make small tweaks to help tilt your portfolio towards investments that could be set up to do better in this type of environment. There are indications that the recent trends in stock markets, a shift from growth investments to value, will be accelerated.

Buffett once said, “Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

Is there any value in tech?

Peter Lynch

American fund manager and author of ‘One Up on Wall Street’, Peter Lynch, rose to fame while managing the Fidelity Magellan Fund between 1977 and 1990.

His approach to picking companies and their performance is what makes him standout.

Being different to Buffett and Graham, Lynch was particularly fond of higher-risk but potentially faster-growing smaller companies.

To find businesses capable of such massive growth, Lynch needed companies that could grow profits quickly. But that alone wouldn’t guarantee success.

Lots of popular companies, those covered by an army of city analysts, are already priced for future growth. That means their share prices normally already take into account how quickly everyone thinks they’ll grow. They often don’t have much of a margin of safety.

Instead, Lynch looked for companies that flew under the radar. Companies with boring names that made money doing boring things. In his book, he mentions one of his favourite investments was a company that simply made women’s leggings.

While Lynch preferred companies that were smaller and generally growing quickly, he also looked for quality. One of our favourite Lynch quotes is “Time is on your side when you invest in superior companies”.

Remember when you’re buying shares, you’re buying ownership in a business. Lynch said if you can’t explain why you own a company in two minutes or less to a ten-year old, you shouldn’t own it. In contrast, his biggest gripe was when investors would tell him they own something because “the sucker just keeps going up”. We agree.

Time is money

None of these best investors became billionaires overnight. Investing is a test of nerve and knowledge, and experience is an asset you simply can’t buy. Time is your best friend, especially when markets are choppy.

Take Warren Buffett. Despite owning a wide mix of companies, Buffett’s Berkshire Hathaway has seen its value fall by more than 30% six times between 1979 and 2019. In early 2000 Berkshire lost 44%.

Investing in lots of companies in a similar category can only give you so much insulation when that style goes out of favour. We think one of the best ways of diversifying a portfolio is by investing with the best fund managers, investing differently, in different parts of the world.

Before investing it’s important to check the fund’s objectives align with your own, understand the fund’s specific risks and if there’s a gap in your portfolio for that type of investment.

You could use the Wealth Shortlist as a starting point. It’s a collection of funds our analysts have researched and chosen for their long-term potential.

As long as you’re diversified, what you buy isn’t always the most important factor. How much you invest and how long for are far more important. So, start early and keep adding as you go.

This article isn’t personal advice. If you're not sure if something is right for you and your personal circumstances, please ask for financial advice.