Warren Buffett is one of the most celebrated investors in history. Many accomplished fund managers credited their success to following the Oracle of Omaha’s common sense value investing philosophy.
Buffett wasn’t born a great investor. He admitted he couldn’t make any money in stocks even after reading many investing books as a teenager. But everything changed when Buffett read Ben Graham’s classic “The Intelligent Investor.” The book’s key tenet is to look at each stock purchase as buying a slice of a business and avoid being distracted by stock price movements. Buffett attributed his eventual success to this investing framework.
“When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”
This was Warren Buffett’s response, on his 87th birthday, when asked about his best investment advice.
He says that experience is the ultimate key to be a successful investor.
However, what about those who are new to investing? What if you don’t have any experience?Well, fortunately you can learn from investors who DO have experience – investors like Warren Buffett himself.
Take a look at these 8 proven investment tips from Warren Buffett:
Diversification isn’t always a good idea
Many good investors stress the importance of diversification. But Warren Buffett tends to disagree with the idea.
Buffett says that diversification is for people who don’t know much about investing. An experienced investor should choose stocks on a long-term basis and should have faith on his/her investments.
Some investors diversify their portfolios because they are afraid that any one stock might sink their entire portfolio; but, while doing so, it becomes much harder to keep track of the current events impacting each company. So, by diversifying, they might reduce the volatility of their portfolio, but at the same time they reduce their focus on individual investments.
Buffett waits for opportunities to buy good stocks, and when those opportunities come his way, he takes full advantage. According to Buffett, “When it’s raining gold, put out the bucket not the thimble.”
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.”
Warren Buffett says that the best investment one can make is on his/her own abilities. 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 Charlie Munger had a similar thought. Munger’s secret to success: sell yourself an hour each day, and use that hour to make yourself better.
Trust yourself to be a successful investor
Buffett says that the hardest thing is to trust your investment decisions. You always think that others are right and you are wrong. Instead, you need to study and believe in yourself.
To be successful, you need to overcome the fear and not pay attention to what others are telling you. Accumulate knowledge and make investment decisions on your own to stand separate from the crown and be a winner.
Only make investments that you understand
Warren Buffett says that many people think quite a bit before making any investment – and sometimes think TOO much.
Buffett cautions that you should never invest in businesses that you don’t fully understand.
He says that if before he invests in the stock of a company, he has to first understand how the company makes money and the main drivers that impact its industry in no more than 10 minutes. If he’s not able to understand it in 10 minutes, he moves on to evaluate another company on this basis.
Most people can’t predict the next fashion trend among teenagers or whether or not a medicine will be successful in the market. Even if if you had more data than anyone else, it’s still impossible to predict the future with 100% accuracy.
In situations that rely on an accurate forecast of the future, Buffett advises not to invest. If it’s complex for you, just look for other businesses to invest in.
Buffet once said that out of about 10,000+ publicly-traded firms, he would like to invest in only a few hundred companies – before even taking valuation into account!
Make sure you choose the right news to focus on
One of the best investment tips from Warren Buffett is to not put too much stock (no pun intended) into each and every news headline that you see.
Buffett believes in the 99-1 rule. Most investors take actions based on 1% of the financial news they consume. Doing so, they quickly sell their stocks whenever bad news comes up – e.g. a company’s revenues have fallen by 10%. If the company in this particular example has been in business for, say, 100 years, then Buffett says that it’s definitely capable of withstanding such events. In other words, people often tend to overreact.
Buying a stock of a company is buying a part of a business
Imagine you’re buying an ownership stake in the convenience store around the corner from your house. Automatically you’ll think about the competition, suppliers, prices, etc. You’ll have to think both about the specific location as well as its competitive position in the market.
Similarly, while buying stocks, you need to think about all these things – just as the people running the business do.
When you buy a stock, you’re not just buying a piece of paper or a ticker symbol. Buying the stock of a company is buying an ownership stake in a BUSINESS.
7. Learn from your mistakes and move on
You might be astonished to know that even Warren Buffett makes mistakes – big ones too. But he makes sure that he learns from his mistakes.
Buffett advises keeping a record of the mistakes you’ve made so that you know what went wrong and make sure you don’t repeat them again.
Buffett further says that you should share these lessons with your children and grandchildren so that they know what mistakes not to commit.
8. Don’t be a day trader
According to Buffett, the secret to getting a better return on investment is to buy a stock and forget about it. He believes in having a buy-and-hold mentality and insists on holding stocks for decades.
There are two principles behind this: (1) if you buy a stock for less than it’s true worth, the stock’s price will eventually converge with it’s intrinsic value; and (2) if you buy a wonderful business, the value of that business will compound and increase exponentially the longer you hold on to it. So, the patient investor will ultimately be rewarded if they hold on to their stocks for a longer time. For Buffett, time is the friend of a wonderful business.
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for ten minutes.”
He says that if you constantly buy and sell stocks, it’ll take away a significant percentage of your returns in the form of trading commissions and taxes. So, it’s better to buy great stocks and holding them for a long time.