I’m listening to Warren Buffett and buying cheap ASX shares

One of the world’s most famous investors is Warren Buffett.

The Oracle of Omaha has earned his legendary reputation after generating consistently strong returns for Berkshire Hathaway over multiples decades.

For example, according to Buffett’s most recent annual letter, Berkshire Hathaway’s market value per share has increased by an average of 20.1% per annum from 1965 to 2021. This is almost double the return of the S&P 500 index, including dividends, which has returned an average of 10.5% per annum over the same period.

Impressively, this means that Berkshire Hathaway has returned a whopping 3,641,613% over the 56 years. This would have turned a single dollar investment into over $3.5 million today.

In light of this, when Buffett speaks, it certainly can pay (almost literally) to listen.

Buy quality cheap ASX shares

Buffett is well known to take advantage of the type of market volatility we have experienced this year. He famously quipped:

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

The good news is that because of inflation and recession fears, there are a good number of cheap-looking shares on the ASX.

However, Buffett doesn’t buy shares just because they look cheap, he buys them when he feels they are trading at a discount to their underlying value.

This means don’t just buy a share because it has dropped 80% this year and you think it will rebound. There could be a reason why that decline has happened and there could be more to come. You could ultimately end up trying to catch a falling knife.

Instead, investors should look for ASX shares that have been sold off but still have strong business models and equally strong outlooks. Buffett explained in his 2014 letter:

[T]hough marginal businesses purchased at cheap prices may be attractive as short-term investments, they are the wrong foundation on which to build a large and enduring enterprise. Selecting a marriage partner clearly requires more demanding criteria than does dating.

This statement echoes something Buffett said in his 1994 letter that could be particularly apt for investors looking for cheap ASX shares. He said:

In my early days as a manager I, too, dated a few toads. They were cheap dates – I’ve never been much of a sport – but my results matched those of acquirers who courted higher-priced toads.  I kissed and they croaked. After several failures of this type, I finally remembered some useful advice I once got from a golf pro (who, like all pros who have had anything to do with my game, wishes to remain anonymous).  Said the pro:  “Practice doesn’t make perfect; practice makes permanent.”  And thereafter I revised my strategy and tried to buy good businesses at fair prices rather than fair businesses at good prices.

The post I’m listening to Warren Buffett and buying cheap ASX shares appeared first on The Motley Fool Australia.

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More reading

• A recession could be coming in 2023. Here’s Warren Buffett’s investing advice
• Is it safe to invest in ASX shares now? Take advice from Warren Buffett
• Almost ready to retire? I’d follow Warren Buffett’s tips to enjoy a growing passive income from ASX dividend shares
• One Warren Buffett-style stock I’m ‘never’ selling
• I’d aim for a million by buying just a few ASX shares

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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