Warren Buffett is considered to be the top investor in the world. His investment advices are considered as timeless. People tend to make a lot of mistakes while investing, but on generalizing it, we can see that most of those fall into any of these 10 buckets Warren Buffett described, which we will discuss below.
By getting a better insight about investment based on these findings of Buffett, the investors can step themselves aside from many of the major traps, which may damage their investment and jeopardize the returns. We can trust Warren Buffett when compared to the other so called ‘financial workshop’ presenters as he practices exactly what he preaches. One can see that Buffett’s financial portfolio is fine-tuned with the guiding principles he puts forward.
Investment advice from Warren Buffett
To make it in a more enjoyable manner, I will try to present these top 10 Warren Buffett favorite investment tips with a typical Warren Buffett quote for the investors to have a better insight to it. Let’s go one by one.
- Don’t be in haste, invest on what you know well
This is the easiest, but strongest tip to avoid mistakes while getting involved in the complex investment vehicles. Most of us do spend our entire life working in different industries. We gain a reasonable understanding about how all such markets and industries work and what the leading businesses are in each of these sectors. However, we have little knowledge or no direct experience at all when it comes to most of the public-traded companies.
“Never invest in a business you cannot understand” – WB
However, it doesn’t mean that you cannot invest capital in the ignorant crannies of the market. Rather, you need to do it with utmost caution. Majority of the companies, operating businesses in various fields, are too complicated for the common men to understand. To make it simpler, what you can understand better can be trusted more. This is a key point in the philosophy of investment.
You may be someone who cannot predict the success possibility of a biotech firm, or what could be the next possible fashion trend, or what can be the next breakthrough in mobile phone technology. All these complex issues will materially affect the returns generated by the major companies in the stock, which is pretty un-forecastable. We have the evidence in front us that Warren Buffett has generally avoided investing in technology companies apart from a single purchase of IBM.
- Don’t compromise on the quality of business
Saying ‘pass’ to a complicated or difficult to understand business seems to be fairly straightforward, but when it comes to identifying businesses quality, it seems to be a challenging affair. The investment philosophy of Warren Buffett had evolved for above 50 years now, and as we can see, if revolves mostly around acquiring shares of the high-quality companies with expected long-term growth and opportunities.
Considering his insights, Berkshire Hathaway in the textile industry was one of the worst investments he has made. He was enticed to purchase it as the price looked cheap. At that time, his assumption was that there will usually be some good news waiting if you purchase a stock at a fairly low price, even if the long-term performance of it remains troublesome.
However, after gaining more experience, Buffett changed his philosophy to a “cigar butt” approach, which is “unless you liquidate, that type of an approach to buying a businesses is simply foolishness.”
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – WB
Falling to debt turmoil can be one of the most dreadful scenarios to end up with if you are making foolish decisions in terms of investment. There may be solutions like companies consolidating your debts or offering various modes of cash advances. But it is always wise to foresee the potential risks involved in an investment and act wisely.
- Buy a stock with the plan to hold it for life
“If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” – WB
It shows that Buffett embraces a philosophy of buy and hold. Many of his positions were held for decades. A quality business always ensures higher returns and enhances its value from time to time. Fundamentals may take years to have an impact on the stock price, and only the patient investors get rewarded.
- Diversification may sometimes put you in danger
Many individual investors gained benefits of diversification by owning 40 to 50 stocks across the industries. Mutual funds may put hundreds of stocks into a portfolio to find a fine balance. However, as an individual investor, Warren Buffett is just the opposite. Back in the 60s, the largest position he owned covered about 35% of his entire portfolio.
Buffet selects investments on long-term basis by weighing the same considerations as to purchasing a 100% operational as:
- Favorable long-term financial characteristics
- Capable and honest management
- Attractive purchase price measured against the value to a private owner
- Familiarity with the industry
“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.” – WB
- Distinguish between news and noise
The 80-20 rule can be applied to it as 80% of the outcomes are attributable to just 20% of the actual causes. When it comes to investment, this has to be a 99-1 rule as per Buffett, which means 99% of investment actions we initiate should be attributed to simply 1% of financial news we come across.
“Remember that the stock market is a manic depressive.” – WB
As investors, one actually should be unbiased to research about whether the news item popping up may truly impact the company’s long-term performance. If the answer is ‘no’, then we may have to stick to doing just the opposite of what the market is going.
While the above 5 are being counted as the most important points, there are 5 more which we may try to explore through the typical WB quotes for you to have a better insight towards Warren Buffett’s investment philosophies.
- It’s not rocket science, but there is no magic button
“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.” – WB
- Distinguish between price and value
“Price is what you pay. Value is what you get.” – WB
- Sometimes the best moves may not be that exciting
“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.” – WB
- For anyone, low-cost index funds may be the most sensible move
“Put 10% of you money in to short-term government bonds and 90% into low-cost S&P 500 index fund.” – WB
- Just listen to those whom you can trust
“We’ve long felt that the only value of stock forecasters is to make fortune tellers look good.” – WB
In a nutshell, it seems that we are used to making investing much harder than it actually has to be. Buffett followed a very simple and commonsense approach to investment as focusing on longer term,