Buffett knows how to get returns on his stock investments, and if you follow these rules, you just might find out how to do so, too!
If we know anything about the CEO and Chairman of Berkshire Hathaway, Warren Buffett, it is that he is a genius at investing. Despite his hefty donations to charity, Buffett is the fifth-richest person in the world, and there is clearly a lot to be learned from him.
He believes in value investing—buying stocks that are trading for less than they are worth and then sticking to them in the long run. This investment philosophy has helped him and his company sail through bouts of inflation and economic downturns with relative ease. Besides following the philosophy of value investing, Buffett actually has a set of rules to pick out the right companies to invest in. Let’s break down these rules and see how we can implement them when making our own investment decisions.
“Rule number one: never lose money. Rule number two: never forget rule number one”
This is the first and most important rule of investment for Buffett. This rule has less to do with the fluctuations in the market and more to do with the temperament an investor needs to have. It doesn’t mean that you can’t undergo loss; after all, even Buffett isn’t immune to that.
Instead, what he does better than most is to live frugally. He lives in the same house he has since 1958 and never fails to pick up McDonald’s for breakfast. His spendthrift habits should be a lesson not just to those looking to invest like him but also for those who run their own businesses. To get rich and stay that way, just like Warren Buffett has, we need to be careful with how we spend our money.
“Never invest in businesses you cannot understand”
Buffett is averse to investing in projects he doesn’t understand in the context of cryptocurrency. He has even gone so far as to say, “I get in enough trouble with things I think I know something about. Why in the world should I take a long or short position in something I don’t know anything about?”
Through this rule, he tells investors to focus on safeguarding their investment by choosing companies/products that they have in-depth knowledge of. While you may find some companies or projects that seem extremely lucrative, it is unwise to invest in them if you don’t fully comprehend what they seek to accomplish.
“Our favorite holding period is forever”
Buffett has a history of finding well-rounded companies and then sticking to them for a long period of time. For instance, Berkshire Hathaway has held on to its investments in Coca-Cola for 34 years at this point. Holding onto the stock has proven to be extremely beneficial for Buffett with Coca-Cola stocks generating returns of 5810% for his company, after factoring in reinvested dividends.
With this strategy working out so well for Buffett, it’s no wonder that he advises others to do the same. “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes,” he says.
“Never invest on borrowed money”
Buffett is strongly against jumping into the investment space if you do not have enough money to do so. He says that it is “insane to risk what you have and need for something you don’t really need”.
There may be times when you see a stock doing so well that borrowing and investing in it might seem like the right thing to do. However, you need to remember that every single stock purchase comes with risk. Even though a stock might be doing well right now, its value can come crashing down and land you in debt if you buy it on borrowed money.
Besides, if you buy stock on borrowed money, your focus would be on returning the money rather than creating a long-term strategy of generating the most returns which goes against the previous rule.
“Be fearful when others are greedy and be greedy when others are fearful”
The final piece of advice you should take from Buffett is to avoid following the herd when it comes to investment decisions. To become a successful investor, you need to rely on your own experience in the market. What Buffett is trying to say here is that when a lot of investors think positively about a particular stock, the prices would inflate. If you purchase such a stock, you would end up overpaying and not seeing equivalent returns.
This goes back to the idea of value investing—picking stocks with high intrinsic value that are trading at a lower price at the moment. It is important to note here that you shouldn’t try to be different for the sake of being different but should just go with your gut instead of following along with what others are doing.
Just because Buffett has had an impeccable career in the stock market doesn’t mean he hasn’t received financial blows from time to time. In the 2008 recession, Buffett personally lost US$23 billion, and his company’s profits also went down by 62% in the same year. Buffett’s experiences should teach you that investment requires learning and re-learning, and that it all boils down to taking informed risks when choosing which companies to invest in. Research the stock you want to invest in thoroughly and rely on your own judgment to make purchase decisions. Hopefully, you will be on your way to becoming the next investment mogul out there!
This article is meant for informational purposes only. Please make investment decisions based on your own discretion.
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Header image courtesy of Wikimedia Commons
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