What else can investors learn from Warren Buffet? An important aspect is that there are ultimately two viable solutions that can be pursued on the stock market. The first, simple option is to invest long-term in broadly diversified index funds. Buffett is not averse to it, even if he doesn’t use it for himself. His choice was the second, difficult path of persistently analyzing companies over and over again.
Of course, this requires a correspondingly high level of competence, which very few people possess. The real risk lies not in beta or volatility, as capital market theories assume, but in suffering permanent losses of the invested capital in the event of incorrect assessments. Therefore, active investors must continually think about a company’s management, products, competitors and debt levels.
In addition, markets are more efficient today than they used to be, where Warren Buffett earned 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 beyond the analysis of individual companies, Warren Buffett has done a lot to explain the markets to the public in a way that is understandable. Perhaps the simplest of his tools is the market capitalization to gross domestic product (GDP) ratio. This allows him to assess at a glance the long-term development of the stock market with regard to possible overvaluations and undervaluations. The ratio is now also referred to as the “Buffett indicator”.