BIPAF - Warren Buffett's Simple Path To Wealth: 'Just Sit And Think'

2023-10-26 21:30:21 ET

Summary

• To build a passive income snowball, Warren Buffett's advice is to do nothing.
• In today's market, this advice is more valuable than ever.
• We discuss our approach to investing in light of Mr. Buffett's advice and share some of our top picks of the moment.

Billionaire investor Warren Buffett of Berkshire Hathaway ( BRK.A )( BRK.B ) once said :

This imaginary person out there -- Mr. Market -- he's kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed. And when he get really enthused, you sell to him and if he gets depressed you buy from him.

He also said :

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

These quotes are very relevant to investors today given the current rhetoric and volatility gripping markets right now. In this article, we will look more closely at the meaning and implications of Mr. Buffett's quotes and then share how it is impacting our investment decision-making process right now.

Warren Buffett Says 'Do Nothing' When The Market Gets Maniacal

The two aforementioned Warren Buffett quotes highlight the importance of discipline, patience, and a long-term perspective for investing. Perhaps Mr. Buffett's secret to consistently practicing this disciplined approach to capital allocation is revealed in his habit of doing nothing when the market gets crazy. As he once stated :

I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business.

With the AI boom, rising interest rates, uncertainty about the future direction of inflation, a wall of corporate and commercial real estate debt maturing in the coming years, signs of cracks beginning to form in the economy, and two ongoing major regional conflicts in Ukraine and Israel that are threatening to expand into much broader conflicts, there is plenty to get crazy about in today's stock market. As a result, many investors are tempted to react impulsively to these trends by selling their plummeting REITs ( VNQ ), utilities ( XLU ), and other high-yielding dividend growth stocks ( SCHD ):

and instead put it all into the soaring technology stocks that are benefiting from the AI boom like NVIDIA ( NVDA ), Palantir ( PLTR ), and Meta ( META ):

However, Buffett's quote reminds us that such emotional reactions can be detrimental to one's long-term financial success.

Instead, the Oracle of Omaha urges investors to adopt a calm and rational approach by ignoring the market's maniacal behavior, driven by a myriad of factors such as news events, emotions, and speculation. Instead of constantly chasing the hot stock or sector of the moment, Buffett suggests that investors should keep their emotions in check and stay focused on their long-term investment goals. Many times, this involves simply doing nothing even when our greatest emotional urges tell us to sell all of our losers and chase the market's recent winners.

'Sitting and thinking' can also help an investor not succumb to impulsive decisions and instead stick to a well-thought-out investment strategy with the long-term in view. Successful stock market investing is not about outperforming the market every day, week, month, or even every year. It is about buying good businesses at discounts to their intrinsic value and then being willing to sit back and wait patiently until the market gives you an attractive offer for your business.

As a high-yield dividend investor, this approach is even psychologically easier for me since I can keep my focus on the passive income stream rather than the daily market value of my portfolio. Since I view my portfolio as a cash flow machine, at the end of the day I crave market volatility since it often provides me with opportunities to separate myself from the pack by behaving in a contrarian manner and accelerating the growth of my passive income snowball.

Rather than changing my investment strategy with each new bubble - which would have required me to be a Bitcoin maniac ( BTC-USD ) in 2018-2019, a disruptive technology ( ARKK ) maniac in 2020-2021, and an AI bull in 2022-2023 ( NVDA ) - and risk buying the top and selling the bottom each time, I have chosen the simpler and more boring path of buying highly profitable businesses that pay out attractive dividends to shareholders whenever they fall out of favor with Mr. Market. This approach requires me to "do nothing" through the ever-shifting cycles of market manias and panics and instead reinvest my dividends into whatever the most attractively priced dividend stocks are at the time. For me - and Mr. Buffett - time in the market is far more important than timing the market. As my passive income snowball grows ever larger, its rate of growth also accelerates due to having more passive income to reinvest each quarter, resulting in an exponential growth curve for my income stream.

Investor Takeaway

So how is that translating into my investment decisions today? Well, given that the majority of my portfolio is invested in utilities, yield cos, REITs, midstream, and other infrastructure - almost all of whom have traded down in recent weeks and months while tech stocks ( QQQ ) have been mostly soaring - my focus is on "doing nothing" to my long-term investing approach of building a passive income snowball. Instead, I am rejoicing in the opportunity that the market is giving me to buy high-quality dividend stocks on sale, accelerating my passive income snowball's growth in the process.

Some of my favorite opportunities of the moment include:

• Brookfield Infrastructure Partners ( BIP ): A broadly diversified infrastructure company that has a stellar track record of generating attractive distribution growth and total returns across economic cycles. It has a BBB+ credit rating, has a highly contracted cash flow profile with significant indexation to inflation that makes it fairly resistant to both recessions and elevated interest rate environments (given that interest rates are often correlated with inflation levels), and is backed by its A- rated parent Brookfield Corporation ( BN ). With its price and yield and levels not seen since the COVID-19 crash, now is a very opportunistic time to load up on a wonderful business trading at a wonderful price rather than chasing overpriced hype stocks.
• Brookfield Asset Management ( BAM ): With no debt and billions of dollars in cash on its balance sheet, an attractive current yield, high growth potential for the foreseeable future, a sticky earnings profile, and substantial competitive advantages stemming from its status as one of the largest global alternative asset managers, BAM is a great buy on the latest dip.
• Atlantica Sustainable Infrastructure ( AY ): AY offers investors a well-covered forward distribution yield of over 10% that is well-covered by cash flow and backed by lengthy power purchase agreements to almost entirely investment-grade counterparties. Moreover, its balance sheet is in solid shape with limited corporate maturities in the coming years and its asset-level debt is mostly self-amortizing. Finally, it enjoys considerable indexation to inflation in many of its PPAs, further hedging its interest rate sensitivity. It is hard to find a more defensive double-digit yield in the market today, particularly one that operates in a sector that has strong long-term growth potential.

As the market becomes increasingly bifurcated by the day between the soaring AI stocks and the crashing value and dividend stocks, and geopolitical tensions mount, economic pressures increase, investors are facing growing temptation to give in to the market's maniacal behavior and be swept away by their emotions. However, I believe it is more prudent to listen to the sage wisdom of Warren Buffett and "do nothing" instead and continue to snatch up attractively priced, quality dividend stocks at deep discounts. Time spent remaining patiently compounding one's passive income stream in the market is a much sounder path to wealth than constantly trying to time the market.

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