Warren Edward Buffett is the Chairman and CEO of Berkshire Hathaway. He is known for his knowledge and skills in the investment field. He was born on August 30, 1930, in Omaha, Nebraska. At age 11 years old, he bought his first share at the New York Stock Exchange. It was three shares of Cities Service Preferred (an oil and gas concern) to be exact.
His first job was a paperboy and he was only 13 years old at the time. By 1944, he amassed $1,000 and filed his first income tax return. Not only was he a paperboy, but he also sold stuff like stamps, beverages, golf balls, and magazine. In high school, he bought cheap pinball machines and made a profit.
At age 15, he had $2,000 of fortune. He used it to buy a 40-acre farm in Nebraska. He made a profit off it by hiring a farm laborer to work the land. This income was used to pay for his college. He graduated from the University of Nebraska with a Bachelor of Science degree. He then went to Columbia Business School where he graduated with a Master of Science in Economics.
As of December 2017, Warren Buffett has a net worth of over $84 billion. He is famous for his "value investing", an investing philosophy. It's a philosophy that looks at the underlying value of a company that most stock charts don't report on.
Warren Buffett has been interviewed many times and has given some tips to other investors. We gathered some of the tips for you to easily search.
Here are the top 10 investing tips from Warren Buffett:
1) Invest in Something You are Knowledgeable of
The logic is simple. You don't want to invest in something that you don't know of. Because you will be clueless as to what is going on or how the investment will fare out. It's like making a farmer go out to the sea and go fishing. If the farmer gets lucky, he might catch one or two fish but compare to a fisherman the gap is incomparable.
You might ask "but I'm only putting in the money and let others do the heavy lifting". How sure are you that the people running the business will not mess up? What will be your basis to know a company's competence when you don't have knowledge of how the business works.
You should always invest in something that you know. Know how it works, how it makes money, and what factors will make it successful.
2) Always Value Business Quality
Warren Buffett was not always successful in investments. He too also made some mistakes. This mistakes made him wiser. He once bought a cheap investment expecting it to yield a huge profit at some point. However, he overlooked the quality of the business was running. In the end, his investment incurred loss.
A great way to measure business quality would be its return of invested capital. Companies with high returns have a higher chance of earning faster. They also tend to be more valuable as time goes by.
The high returns indicate the value of the business. It is an indicative factor on what's the future of the business. Try and invest in companies that have a stable return on invested capital. Don't be tempted to buy investments that are really inexpensive. Instead, go for an investment that has good quality. It will guarantee you a good return on investment in the long run.
3) When Buying Stocks, Keep it Forever
The premise is that if the investment is valued highly why sell it? It gives you a return on your investment. Plus if you followed the 2nd tip, you invested in a quality business. This means that you have good returns and the value of your investment increases over time.
It's also rare to find a business that is running well over long periods of time. This means that the business has a good and bright future. So any investment would have less risk.
Also buying and selling stocks hurts your investment returns. Trading activities are accompanied by taxes and trade commissions. This would cut away at your potential investment return. You should instead buy and hold.
4) Portfolio Diversification isn't Always The Way to Go
Warren Buffett doesn't diversify his portfolio. His reasoning is that he invests in quality companies that are rarely offered at a reasonable price. Such an opportunity is rare and when it comes you must grab it.
You can follow his criteria for evaluating a quality company:
- Favorable long-term economic characteristics
- Competent and honest management
- Purchase price attractive when measured against the yardstick of value to a private owner
- A familiar industry and competent long-term business characteristics
Most investors diversify their portfolio as a means of protection of investment failures. Oftentimes the number of stocks they own is so many that it's hard to monitor them. You might overlook a valuable event that affects your investment because there are too many stocks you need to keep tabs on.
If you already own many stocks and investments, you should consider trimming it down. You can follow Warren Buffett's portfolio. His largest stock position was 35% of his entire portfolio.
5) The News is Just a Buzz
You might have watched or read financial news. Don't always take their news at face value. Your investment decisions should not be wholly influenced by financial news.
Some news out there is used to advertise and make you do something. They generate buzz in order to popularize something.
Other news might also report negatively on a company. You should bear in mind the quality of the business the company runs. Would you really sell your stock of Google if they had a slight downturn? Financial news company would tend to sensationalize these matters in order to remain in business.
The stock market is very unpredictable. You should not rely too much on the news for information. Do your own research. Almost all companies out there have data presented for their investors. You should make full use of it.
6) There is No Shortcut in Investing
Investing isn't only for smart people. All it takes is effort and willingness to learn. Even Warren Buffett himself made some mistakes along the way. As long as you study the trade then you'll be fine.
Don't be fooled by so-called "experts" introducing you to some method or formula that guarantees you a large return of investment. If their method worked, then they shouldn't be reaching out for you to buy their books or subscription. They are enticing you so that they can earn a profit.
7) Learn to Distinguish Price and Value
There are certain cases where stock prices do not really relate to its value. Take for example the financial crisis of 2008. Investors were so quick to sell off their stocks. They disregarded business quality and the future of the company in their decision.
As an investor, you shouldn't let emotions get the better of you. You should be able to distinguish stock prices and its intrinsic value. The stock market is always volatile. It's hard to predict. But business quality is a constant indicator of investment success. You should try to aim for quality business companies that are offered at a reasonable price.
8) The Best Investment Strategies are Slow and Boring
A successful investment is a slow one. Investing is not a fast way to get rich. The process is long and will take some time to get a return on your investment.
You should keep yourself from investing in upstart companies you think might succeed. Instead, go for long-standing quality companies. Your goal is to find a quality business that will increase in value over time. You should refrain from risking an investment to an upstart company that has not been tested.
Also when there is a crisis in the economy, well-known companies tend to toughen it out. They also have a good following of consumers because they have already established their brand. There is a lower chance that your investment will not yield a good return.
9) Go for Low-Cost Index Funds
You might make mistakes in investing. You could have taken unnecessary risks, deciding by emotions, or investing in something out of your field expertise. Warren Buffett advised investing in index funds. He believes that the trust's long-term results from the policy will be greater compared to most investors.
An index fund is a passive investment. This means it is not actively managed by financial managers. No financial manager means you don't have to pay high fees. It also costs less and will perform well over time according to Warren Buffett.
10) Only Hear Advice From People You Know and Trust
When it comes to investing, you should entrust your money to people whom you know and trust. Warren Buffett is very selective when it comes to choosing his business partners. Their actions will decide the direction the investment will head into.
As an investor, you might lack the resource to evaluate the management responsible for your investments. But there are other ways to gauge their competence. You can look at customers feedback. Experience is always a good way to gather information. And previous customers opinion will tell you how the management runs their business.
At first, we thought that investing is for smart and complicated people. But it's not. Warren Buffett's method showed us that investing can be made simple and driven by common sense. His tips are sensible and simple. Following his tips will help you better manage your investments and portfolio. It will also help you make good decisions and avoid investing mistakes.