I’m sure many of you have heard of Warren Buffett (a.k.a. the best investor of all time) unless you’ve been living in a cave or too rich to bother, hopefully, the latter. He is the second richest man on the planet with a net worth of 87 Billion USD (as of 2017). He achieved that sum of money solely through investment.
Before you tell yourself, “oh I do not have the capital for that sort of thing”, or “I have no experience at all”, let me remind you that Warren Buffett started with a net worth of $142.75 at 1942 when he was only around 12 years old. Nobody is born with any experience. It takes time and energy to gather some, which is why it is always wise to start young, and that applies to everything in life, including investing of course.
There are many strategies and skills that Mr. Buffett use to acquire his fortune, and he has been very generous with sharing them. This brings us to these next 10 top tips which we find would be most valuable to you.
Invest in yourself first
“The best investment you can make is in your own abilities. Anything you can do to develop your own abilities or business is likely to be more productive.”
Most people are not going to make most of their money from the stock market. They’re going to make it from their careers. So put yourself first.
Buffett’s partner Charlier Munger had a similar thought. Munger’s secret to success: sell yourself an hour each day and use that hour to make yourself better.
Invest in what you know, and nothing more
One of the easiest mistake that most people did not avoid is getting involved in overly complexed investments. Most of which are industries they had heard of once or twice in their lives, and they daringly put money in them.
Majority of us spent our entire career working in only a handful of industries, and we can reasonably say that our grasp on these particular markets are better, pertaining to how they work and which company might be superior over another. So the question is why don’t we use this knowledge that we gained from years of experience to our advantage and make some returns out of it?
“Never invest in a business that you cannot understand.” – Warren Buffett
This doesn’t forbid one from investing in new markets and industries, but Mr. Buffett would advise that you need to exercise caution and do your ‘homework’ before you attempt to try.
You probably heard that risk is always associated with the investment, which is definitely true, and that you can lower that risk by ‘diversifying’ your portfolio. This brings us to our next point.
Diversification can be dangerous
Back in 1960, Warren Buffet’s largest position held 35% of his entire portfolio, as opposed to owning over 20 mutual funds, each containing over hundreds of stocks.
Mr. Buffett invests with conviction behind his best ideas and realizes that the market rarely offers up great companies at reasonable prices.
When he sees an opportunity, he pounces.
“Opportunities come infrequently. When it rains gold, put out the buck, not the thimble.” – Warren Buffett
Many investors fear risk and excessively diversify their portfolios by owning over 100 stocks from different industries, which makes it virtually impossible to keep tabs on current events impacting those companies. When one has no idea of what they are investing in or what is happening with their invested companies, they can be sure that mediocre business is part of their ‘diversified’ portfolio, which will dilute the impact from its high-quality holdings.
“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.” – Warren Buffett
If you own more than 50-60 stocks, you might seriously consider cutting those numbers down and focus on businesses that you have prior experience or interested in. Moreover, if you have not started investing, you now know the maximum amount of stocks to safely hold.
Focus on the right news
Warren Buffett believes in the 99-1 rule, which is to act based on 99% of the news instead of the 1%. This may sound obvious, but the truth is, too many people act based on the 1% news such as – the company loses market share by over 5%. If you chose to invest in this company, and it has been doing well for an extended period of time, Buffett says that it is definitely capable of withstanding such events, which incurs losses to those who overreact to such news.
I’m sure you would not put your money into a company by having a glimpse of – company makes a profit of 10%. Surely you would read the remaining 99% of news from whatever source you can find and then make the important decision of whether to invest in them, so why should you overreact to the 1% bad news?
Investing isn’t rocket science, but there is also no easy button.
One of the greatest misconceptions about investing is that only sophisticated people can successfully pick stocks that will yield favorable returns.
Contrary to the belief, raw intelligence is one of the least predictive factors of investment success.
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.” – Warren Buffett
It does not take a genius to follow Warren Buffet’s investment philosophy since the difficulty lies in consistently beating the market and sidestepping behavioral mistakes.
Equally important is the fact that there is no such thing as a magical set of rules, formula, or ‘easy button’ that one can follow to ‘get rich’. It does not exist and probably never will.
“Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood…these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the models. Beware of geeks bearing formulas.” – Warren Buffett
Investing is a difficult art that requires thinking and it should not feel easy, so next time anybody tells you they are an expert and why investing is the easy way to get rich, quote the following,
“It’s not supposed to be easy. Anyone who finds it easy is stupid.” – Charlie Munger
Margin of safety
When analyzing a prospective investment, Buffett wants the entry price to be much lower than his estimated value for the company. The difference between this two figures is the margin of safety, which limits the losses in case of errors in his business analysis or assumptions. In case you are wondering, YES even the great Warren Buffett makes mistakes and not 100% of his investment have been profitable, so don’t be afraid of making mistakes. He also advises keeping a record of the mistake you’ve made so you don’t repeat them, and share them with friends and family so they can learn from your experience, saving them the trouble.
“On the margin of safety, which means, don’t try and drive a 9,800-pound truck over a bridge that says it’s, you know, capacity: 10,000 pounds. But go down the road a little bit and find one that says, capacity: 15,000 pounds.” — Warren Buffett, 1996 Berkshire Hathaway Annual Meeting
Buying a stock of a company is buying part of a business
When buying stocks, you need to put yourself in the shoes of the business owners and those running it. Imagine buying stakes in a supermarket that is near your house, you must think about the competition, supplier, prices, convenience, etc. Anything that has to do with profitability and sustainability must be well thought through by you since you now hold part of the company’s share, making you one of their owners, however small a % you might be holding.
Remember, you are not just buying a piece of paper, but ownership stake in a business.
Don’t be a day trader
Warren Buffet says that when you are considering owning a stock, plan to own it forever. The secret to getting a better return on investment is to buy a stock and forget about it, which can be achieved by having a buy-and-hold mentality and insisting on holding stocks for decades.
There are two principles behind this: (1) if you bought the stock for less than the actual value, its price will eventually converge; and (2) if you buy a wonderful business, the value will compound and increase exponentially the longer you hold on to it. The moral of the story is “Reward goes to the patient investor who is willing to hold onto their stock for a longer time.”
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for ten minutes.” – Warren Buffet
Save yourself the stress and trouble of constantly buying and selling, as the trading commissions and taxes will devour a significant portion of your returns, and your mood will possibly fluctuate more than the price of bitcoin. Be smart in choosing your investment to save yourself the unnecessary dilemma whenever you encounter the 1% of negative news.
Know the difference between price and value
“The stock market is filled with individuals who know the price of everything but the value of nothing.” -Phil Fisher
Stock prices are inherently more volatile than underlying business fundamentals. Put simply, there are periods in the market where stock prices are non-correlated to the long-term prospect of the company.
Fun fact: Warren Buffett made hundreds of millions of dollar during the global financial crisis when all those panicking stockholders are selling away their companies which had huge upside potential and little downside risk, all because those investors could not see the inherent value and long-term earnings potential.
Firms that can survive during the financial crisis are known today as a multi-billion company that leads their entire industry, and most of them started in a single warehouse, with a computer that is probably not as smart as the smartphone you own now.
“During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group, they were certain to do well.” – Warren Buffett
As long-term investors, Warren Buffett’s investment advice is to buy quality when the price is marked down, in short; buy low, sell high.
“Price is what you pay. Value is what you get.” -Warren Buffett
Investors need to distinguish between price and value, concentrating their efforts on high-quality companies trading at the most reasonable prices today.
The best moves are usually boring
Unlike what you see on google ads, investing is NOT a path to get rich quickly. Everyone who tells you so are either dreaming or lying.
We believe that the stock market is the best mean to moderately growing your existing capital over long periods of time, and not see 400% returns tomorrow.
Unlike gambling, investing is not meant to be exciting, in fact, it is a mundane process of slowly accumulating wealth, with dividend growth investing being a particularly conservative strategy that you should probably begin with.
“We make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it.” – Warren Buffett
Rather than find the next major winner in an emerging industry, it is often better to invest in companies that have already proven their worth. Keep in mind the chance of you hitting the lottery is smaller than the chance of you getting banged by a lorry while on your way towards claiming the reward!
“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.” – Warren Buffett
There is no need to be a hero and impress anyone with your investments. Boring can be beautiful.
Closing thoughts on Warren Buffett’s Investment Advice
Humans always tend to overcomplicate things, with the majority having the misconception that investment is way too difficult. They would be better off keeping their money safely in the bank.
There is a reason why Warren Buffett is so successful and perhaps the most successful investor in the history of investing. We don’t need to be half as successful as he is, just 1% would do since it’ll be roughly 870 million. I’m pretty sure we’ll all be contended.
Lastly, thank you for viewing this article and we hope you learned something. Please comment on your opinions and what you would like to see next time! We’ll end with one last quote from another genius.
“Compound interest is the eighth wonder of the world. He who understands it earns it… he who doesn’t… pays it..” -Albert Einstein