What else can investors learn from Warren Buffett? An important aspect is that there are ultimately two viable solutions to pursue in the stock market. The first, simple option is to invest in broadly diversified index funds over the long term. Buffett isn’t averse to it, even if he doesn’t use it for himself. His choice was the second, difficult path to persistent analysis of companies over and over again.
Of course, this requires a correspondingly high level of competence, which very few people possess. So the real risk is not in beta or volatility, as capital market theories assume, but in suffering permanent losses of invested capital in the event of incorrect assessments. As a result, active investors need to constantly think about a company’s management, products, competitors and leverage.
In addition, markets are more efficient today than they used to be, when Warren Buffett reaped most of his excess returns. Investors must therefore consider whether, despite all the effort, they can still find enough opportunities on the markets. But even apart from the analysis of individual companies, Warren Buffett has done a lot to explain the markets to the public in an understandable way. Perhaps the simplest of his tools is the ratio of market capitalization to gross domestic product (GDP). This enables him to assess the long-term development of the stock market at a glance with regard to possible over- and undervaluations. The ratio is now also known as the “buffet indicator”.