- Date : 22/11/2020
- Read: 5 mins
With an emphasis on a long-term view, Warren Buffett’s investing strategy and principles can help first-time investors to maximise return on their investment portfolio.
Why must you start investing? Simply putting your money in a savings account won’t increase your wealth. In fact, inflation often outstrips any interest you earn. You must get your money to make money while you are busy with life. Setting aside money and investing it wisely is a good way to continuously grow your income and reap the rewards in future.
Yes, investing can seem intimidating at first. Most people are wary of putting their hard-earned money on the line, but with some research and due diligence, you can build a robust investment portfolio. If you want to learn how to invest money, but don’t know where to begin, here are some rules by legendary investor Warren Buffett that can help you formulate an investment strategy.
According to Buffett, the two golden rules of investing are: Rule #1: Never lose money; Rule #2: Never forget rule #1.
1. Buy and hold
Warren Buffett is a firm believer in long-term value investing and constantly reiterates this. He famously said, “if you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” The secret to better return on investment is to buy a stock and forget about it. Be patient. Quality investments earn returns and grow exponentially over time. Basically, his mantra is 'don’t trade; invest'. Frequent trading will erode a significant chunk of your returns in the form of commissions and taxes. So, you should rather hold it for longer and benefit from a good return on investment.
2. Stay with cash if necessary
Investment opportunities are not always available, or it might not be the right time to invest in a particular industry in the prevailing economic environment. Valuable investment opportunities arise through market corrections or individual stocks that become bargains. But these events cannot be accurately predicted. If no companies in your list fit your investment objectives, having that cash on hand would be a wiser option. Staying in cash is also an important investment position.
3. Invest in companies you understand
Buffet cautions against investing in companies or industries one does not fully understand. A good investment strategy is to first understand how a company makes money and the main factors that impact its industry. It will make it easier for you to stay up to date on industry trends. If you are interested in a company that is generating a lot of buzz but do not know a lot about it, research it first. If it looks too complex for you, don’t spend too much time trying to evaluate it. Move on to a business or company you do understand.
4. Look for quality companies to invest in
Investing in a company based on hype is a rookie mistake and a recipe for long-term failure. An efficient long-term investment strategy is to pay a fair price for a quality company instead of a low price for a mediocre one. According to Buffett, a valuable company is one that can remain stable or predictable for the next 10-15 years. Companies with strategic assets and pricing power have a comparative advantage and outperform during downturns as well as when the economy is booming. Find companies you like and wait for the right price and opportunity.
5. Know the difference between price and value
“Price is what you pay. Value is what you get,” says Warren Buffett. In most cases, stock prices fluctuate and are inherently more volatile than a good company’s fundamentals. Price can be temporarily separated from its business value. He follows the rule of buying stocks at a price below their intrinsic value and holding them until the price reflects the real company value. A company’s stock price may swing with investor sentiment, but that doesn’t necessarily mean its future cash flow is unstable. Buffett’s advice is to distinguish between price and value and focus on high-quality companies. Just because a stock is cheap does not mean it’s a good investment.
6. Choose the right news to focus on
One of the most important pieces of investment advice by Buffett is not to pay too much attention to commentators on TV or market rumours. Be very selective about the news you listen to - much less act upon. Most of the news headlines are just noise generated to trigger investors’ sentiments and get them to respond. He believes in the 99-1 rule, where 99% of the investment actions should be based on just 1% of the news that investors consume. If a company has been in business for (say) 100 years, Buffett believes it is strong enough to withstand unexpected short-term challenges.
7. Sell at the right time
Although Buffett follows the ‘buy and hold’ strategy, he also recommends selling if the company’s fundamentals have changed and no longer fit your investment criteria. He believes successful investing is about picking good stocks at the right time and staying with them as long as they remain good companies.
Related: What Is Short Selling?
8. Invest like you are buying the entire company
Buffett advises investors not to think of their investments as ‘stocks’ but to think of buying a stock as buying an entire company. When you buy a stock, you are not just paying for a ticker symbol; you are paying for an ownership stake in the business. Buy into a company because you want to own it, not because you want the stock to go up.
Investing is often made out to be harder than it needs to be. By following Warren Buffett’s simple approach rooted in common sense, you can learn to manage your portfolio better and reduce the number of costly errors while earning a higher return on your investment. Money quotes by Warren Buffett to live by.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.