Warren Buffett's investment advice is timeless. I can no longer track the number of investment mistakes I have made over the years, but almost all of them are related to one of the 7 investment recommendations given below by Warren Buffett.
By keeping Buffett's stock market advice in mind, investors can protect themselves from common traps that could damage their investments or jeopardize their financial goals.
What Are Warren Buffett's Investment Strategies?
After considering it at length, I have compiled 10 of my favorite Warren Buffett investment tips as follows.
I used quotes from Warren Buffett's words to be supportive at the end of these recommendations, each of which is worth gold for investors seeking safe stocks. Let's start reading without wasting time.
1. Invest in what you know and nothing else.
One of the easiest ways to make an inevitable mistake is to make entirely complex investments. Many of us spend our entire careers outside of a handful of different industries. It seems that we have a reasonable and strong understanding of how these particular markets work and which are the best companies operating in them. However, most of the public companies operate in sectors where we do not have direct experience.
"Never invest in an industry you cannot understand." - Warren Buffett
This does not mean that we cannot invest in such areas of the market, but it is useful to approach these areas with caution. In my opinion, the vast majority of companies operate in sectors that are very difficult to understand for me. This is one of the key points in my investment philosophy that I have not kept in mind.
Needless to say, it is impossible for me to predict how much future success will be in the future of drugs on which biotech companies continue their R&D activities, what will be the next mainstream fashion trend for young people, or the next technological breakthrough that will trigger a major development for semiconductor parts.
These types of complex issues are difficult to predict but clearly affect the earnings in the market generated by many companies. When faced with such a business opportunity, my answer is simple: "Rust".
There are so many fish waiting to be kept at sea before they can start working on an incomprehensible industry or company, which is why Warren Buffett has always avoided investing in the tech industry (apart from buying IBM shares, of course).
If I don't get a reasonable understanding of how a company makes money and the key drivers affecting the industry within 10 minutes, it's time for me to consider the next investment idea.
I guess the number of people who meet my personal criteria for business simplicity among more than a thousand publicly traded companies is no more than one hand. Also, some industries do better in dividend income than others.
Peter Lynch once said: "Never invest in an idea that you cannot describe by drawing a simple picture with crayons." he said. It may be possible to avoid many mistakes by staying within our field of competence and not dropping crayons.
2. Never compromise on the quality of the job.
The clearer your answer to "no" for complex jobs and industries, the harder it is to discern high-quality job opportunities.
Warren Buffett's investment philosophy, which requires focusing only on highly qualified companies that promise long-term opportunities for sustained growth, has taken its current form in exactly 50 years.
Some investors may be surprised to learn that the name Berkshire Hathaway comes from one of Buffett's most unsuccessful investments. Berkshire was a textile company, and Buffett was attracted to its cheap price and bought the company's shares.
According to Buffett, when you buy a stock that is low enough in price, you can always see unexpected positive developments where you can make a good profit by selling that stock, even though the company performed poorly in the long run. After many years of experience, Warren Buffett changed his view of low-priced stocks called "cigarette butts" and began to say that using this approach was foolish.
"It is much better to buy an excellent company at a high price than a mediocre company at an affordable price." - Warren Buffett
One of the most important financial criteria I use to measure the quality of the business is the rate of return on the money invested. Companies that earn high capital income can consolidate their income more quickly than those with low capital income. As a result, the real value of these businesses increases over time.
"Time is the friend of successful companies, but the enemy of the intermediate." - Warren Buffett
High capital income creates value and is often an indicator of the company's competitive advantage. The companies I prefer to invest in are companies with high return on capital (for example, 10-20%) and stable.
Make sure you feel comfortable with the nature of the company's business before you buy a stock that pays off a 10% dividend and take stock of a company that promises you 8 times the return.
3. When you buy a stock, plan as if you would keep it forever.
When you invest in a high-quality business at a fairly reasonable price, how long should you hold that investment?
"If you don't intend to hold a stock for 10 years, don't think to keep it for even 10 minutes." - Warren Buffett
"Our favorite period of holding stocks is infinitely long." - Warren Buffett
"If the correct job was done when a common stock was purchased, it is almost never time to sell it." - Phil Fisher
Warren Buffett's open approach is the "buy and hold" approach. Buffett still retains some of the investments it made decades ago. So why? One reason for this is that it is difficult to find great job opportunities that continue to offer a hopeful long-term projection. Another reason is that qualified jobs gain high returns and their value increases over time. As Warren Buffett puts it, time is a friend of successful companies. It may take years for market rules to affect stock prices, but investors who can only remain patient during this process can pay off their patience.
Finally, the third reason is that business activities are an obstacle to return on investment. Buying and selling stocks on an ongoing basis damages the return on investment through taxes and trading commissions. Instead, buying and waiting is the right thing to do.
"The stock market is designed for the transfer of money from active people to the patient ones." - Warren Buffett
4. Diversity can be dangerous.
I also touched upon the issue of diversity in an article I wrote about stock portfolio creation methods recently. In my opinion, individual investors can take advantage of the diversity when they buy between 20 and 40 stocks from different industries.
But Warren Buffett takes a completely different approach. In the 1960s, 35% of Buffett's entire portfolio was its largest investment.
To put it simply, Warren Buffett is an investor who makes his investments with the belief that he is supporting them, and is aware that very rarely big companies are positioned in the market at reasonable prices.
“You may have noticed how relatively little the principal capital we hold is. We evaluate the investments we will make in the long term in the light of certain criteria, which are the same factors that we will evaluate when purchasing 100% of an operating company. These are: (1) Are their long-term economic properties favorable? (2) Is there a competent and honest management structure? (3) When evaluated in the light of the value criterion applicable to the owner, is the purchase price attractive? (4) Is it a sector we are familiar with and whose long-term characteristics can be evaluated competently? It is difficult to find investments that meet such criteria, and this is one of the reasons we manage a concentrated portfolio. We cannot find hundreds of different stocks that fit our investment requirements. However, it is quite satisfactory for us to keep a number of investments concentrated, which we consider attractive. ” - Warren Buffett
However, when Buffett encounters an investment opportunity that meets the criteria mentioned above, he does not hesitate to make a quick move.
“You don't often encounter opportunities. When gold starts to rain from the sky, go out with your paper money, not with your shields. " - Warren Buffett
On the other hand, some investors try to diversify their portfolios too much because of their fear or / and lack of knowledge. However, having all 100 stocks makes it impossible for these investors to keep up with the developments affecting their companies at the same time. In addition, too much diversity often indicates that the portfolio consists of investments in a number of mediocre business opportunities, undermining the impact from high quality investments.
“Diversity is a way to protect yourself from ignorance. For people who know what they're doing, diversity doesn't matter. " - Warren Buffett
One of the people who summarizes this situation best is Charlie Munger:
"The idea of too much variety is a crazy idea." - Charlie Munger
How many stocks do you have? If your answer is between 50 and 60, maybe it's time to consider lightening your portfolio so you can better focus on your most qualified investments.
5. Most of the news are not really news, but are just noise.
There is no decrease in the number of financial news that fall into my mailbox every day. I have a pretty bad reputation for reading headlines as I quickly get rid of almost all the news that comes in my way.
The 80-20 rule says that 80% of the consequences of an event are related to only 20% of the reasons behind this event. When it comes to financial news, I can easily claim that this rule has turned into the 99-1 rule, and that 99% of our investment actions are only about 1% of the financial news we read. The news headlines and most of the talk shows on television have no function other than creating rumors and stimulating our emotions so that we do nothing.
“However, stockholders often tend to behave irrationally themselves, influenced by the constantly changing and often irrational behavior of their colleagues. Because there are a lot of people chattering around about the markets, the state of the economy, interest rates, stock prices, and some investors believe it is important to listen to these "scholars" and, even worse, to act on their views. " - Warren Buffets
The companies that I have focused on investing are those that have passed the test of time so far. Some of them have existed in the business world for 100 years and have encountered every unexpected challenge imaginable so far. Who knows how many “dire” reports have been made about their corporate lives. Despite this, they still stand firmly.
Do I have to divest my most reliable shares since the stock values have lost 10% in value since my first purchase? Should I sell my shares in that sector because falling oil prices are reducing the demand for some products?
The answer to these questions would almost always be a strong "no", although I know that stock prices can also be significantly affected as such issues emerge. Because of its nature, financial news has to announce such issues with big headlines in order to stay in the business world.
"Remember that the stock market is manically depressed." - Warren Buffett
As an investor, when we come across any news, we need to ask ourselves whether the issue under this news will really affect our company's long-term earnings power. If your answer is "no", it seems that we need to act in the opposite way as the market behaves (For example, did Coca-Cola's return on investment due to temporary factors decreased by 4%, you can consider the idea of buying stocks).
The stock market is an unpredictable and dynamic force. We need to be extremely selective about the news we prefer to be heard. In my opinion, this is one of the most important investment advice.
6. Investment is not as difficult as you may have seen, but there is no magic wand either.
Perhaps one of the biggest misconceptions about the investment world is the widespread belief that stock collection will only be done successfully by experienced and knowledgeable people. Yet, raw intelligence is arguably one of the most important factors behind investment success.
“You don't have to be a rocket scientist. The world of investment is not a playground where someone with an IQ of 160 deserves someone with an IQ of 130 ”- Warren Buffett
You don't have to be a genius to follow Warren Buffet’s investment philosophy, but consistently achieving market success and avoiding certain behavioral mistakes is not the kind of job anyone can tackle.
Equally important is the absence of a miraculous set of rules, a formula or a magic wand that will allow you to make overwhelming effects in the investment world. Such things do not happen in the field of investment, and they will never happen.
“Investors should be skeptical of history-based models built on outdated teachings. These models tend to look impressive. Investors often forget to question the assumptions behind these models. Be careful with those who come to you with formulas. " - Warren Buffett
People who claim to have such a way to grow things are either very inexperienced or no different from the con artists I have mentioned in my book. Beware of those who have declared themselves the "guru" of the investment world and are trying to market you a regulated method for investment activity. Even if such a method existed, the owner of this method would appreciate that he would not try to sell his books or charge you a usage fee for his method.
"It's easier to fool people than to convince them that they're being fooled." - Mark Twain
It is appropriate to stick to well-established investment principles, but even if you do, remember that investment will continue to be a challenging endeavor that needs thinking.
7. Know the difference between price and value.
Stock prices have always been a driving force for us. For some reason, investors often can't take their eyes off the price quotes they see on their screens.
"The stock market is full of people who know the price of everything but the value of nothing." - Phil Fisher
However, in many cases stock prices are inherently more unstable than underlying core business elements. In other words, there may be times in the market where stock prices have almost nothing to do with a company's long-term projection.
The market witnessed many compromises during the financial crises as investors wanted to quickly sell off their holdings, regardless of business nature or long-term earnings potential. During the downturn, many companies continued to strengthen their competitive advantage and managed to get out of the crises with a brighter future projection.
In other words, companies' stock prices were able to temporarily separate themselves from the underlying business value.
“Even in the atmosphere of extraordinary panic in the financial world towards the end of 2008, I never had the thought of selling my farm or my property in New York, although I knew that a period of clearly strong decline was approaching. Even if I had a job where I own 100% and has a good chance of success in the long run, it would be foolish to consider leaving that job. So why would I consider selling my stocks I have in great industries? True, I finally had the chance to sell any of these stocks, but only when they were together I could do a good job. " - Warren Buffett
As long-term investors, we need to take into account Warren Buffett's investment advice to buy quality business when the price is low.
"Price is about what you pay, and value is about what you get." - Warren Buffett
Stock prices vary with the emotions of investors, but that doesn't mean a company's future cash flows change. The future earnings of companies have always been a matter of debate, but these disagreements are not as strong as the instability of stock prices. Investors need to understand the distinction between price and value and channel their attention to highly qualified companies trading shares at the most affordable prices today.More Business Posts: Business ideas