Warren Buffett investing principles
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| Warren Buffett investing principles |
Being the world’s greatest capitalist comes with a name of its own, after all.
“Rule 1: Never lose money.”
“Rule 2: Never forget Rule 1.”
The CEO of Berkshire Hathaway is regarded as a living legend. He has amassed a net worth of almost $85 billion, which makes him the third wealthiest person in the world.
Warren Buffett investing principles have been the subject of immense interest for investors and analysts across the world.
Well, that’s rather obvious, isn’t it?
Who wouldn’t want to learn from the Oracle himself?
Who wouldn’t also want to amass a personal wealth that is even a fraction of Buffett’s?
That, my dear friends, is where I come in.
I am going to take this opportunity to tell you about the three main investing principles that Warren Buffett lives by. After all, if they worked for him, they could probably work for you too.
Let’s get started then, shall we?
The first principle is perhaps the most basic as well as the most universal.
Invest in what you understand.
“Buy a stock the means you'd purchase a house. Understand it and like it such that you’d be content to own it in the absence of any market.”
For any potential investor out there, especially any long-term ones, the first step is to select which company you would like to invest in. While making this selection, it is imperative to do your own research and find out whether the company’s business plans and projected growth fit in with your own investment goals.
The process of evaluating a company would be challenging and unnecessary difficult if you knew nothing about the industry or the company, wouldn’t it?
The advantage of investing in businesses you understand is fairly self-explanatory. It not only would be easier to research the company, but you would also be able to follow the current market trends relating to that industry, with little additional effort.
If you study Warren Buffett’s investment portfolio, you will notice the fact that technology companies are almost entirely absent from purview. This may seem somewhat strange and come off as a missed opportunity. In fact, Buffett was approached by Google before its initial offering and he turned them down.
This is, however, entirely compatible with Buffett’s foremost investing principle. He only sticks to those companies and those industries that he fully understands. After all, how will one invest during a company when one doesn’t comprehend how the company would keep profitable??
Be warned, many potential investors have fallen prey to the dangers of chasing novelties.
There is always at least one new industry that suddenly flames across the investment horizon like a meteor and dazzles everyone with its shining prowess.
Such phenomena are generally transitory, and such companies often fizzle out into the darkness in the blink of an eye.
Let us consider the example of the recent attraction to the blockchain technology companies. The value of Bitcoin(BTC) fell from almost $20,000 to a mere $7,000 in a span of just a few years.
The second principle defines Buffett’s style of investing.
Invest in companies with favorable long-term prospects.
“Our favorite holding period is forever”.
Imagine the company you want to invest in, like a castle. Buffett describes associate degree “economic moat” round the castle/business that is totally preponderant for defense.
What does this mean?
An economic moat can be translated into anything that will allow the company to retain a competitive advantage in the long run. In other words, the company should have an iron-clad plan for the future, to ensure the same or a higher rate of growth persists.
An economic moat can be translated into anything that will allow the company to retain a competitive advantage in the long run. In other words, the company should have an iron-clad plan for the future, to ensure the same or a higher rate of growth persists.
As potential investors, you need to study the company’s growth plans for the future. The second principle defines Buffett’s kind of investment.
Otherwise, what would be the purpose of investment in a company that can't defend its own position within the market?
Buffett further elaborated on this point and said, “A moat that must be continuously rebuilt will eventually be no moat at all”.
This idea or principle seems ridiculously obvious, doesn’t it?
However, most investors are generally wowed by sudden spurts of growth in companies and spend their hard-earned money on shares without even considering what the long-term implications of their decision will be.
Any company would look attractive at its peak. It would be advisable to not be seduced by the one-dimensional face value. You have to check whether the company will survive in the long run, whether your investment will pay off in the future.
Let’s move on then, shall we?
The third principle is pure genius.
Invest in quality companies when they are marked down.
“Whether we have a tendency to are talking concerning socks or stocks, i prefer shopping for quality merchandise once it's marked down.”
Buffett adopted this principle from investor and mentor Benjamin Graham, WHO had an enormous influence on him. This is centered on the concept of value investing.
“Price is what you pay; value is what you get.”
Now, Buffett typically buys the complete company or enough to place him on the boards of the businesses.
The purchase call, however, comes right down to the worth append the corporate.
This principle additionally applies to traditional investors, World Health Organization would obtain perhaps a couple of hundred shares rather than a couple of thousand.
You see, fluctuations are commonplace in the stock market. Even though the stock prices change instantaneously, the intrinsic value of the company does not change as often. Smart investors always buy quality stocks when they are undervalued.
Buffett swears by his buy-and-hold philosophy. I think any potential investors out there should do the same. Good businesses always bounce back in the market. If the foundation is powerful, the stock costs can eventually mirror it.
If you need any more conclusive proof of this fact, let us revert back to the age-old story of the race between the hare and the tortoise. The hare used sudden bursts of speed to get ahead in the beginning. However, he was lazy and his lackluster performance in the rest of the race really let him down. The tortoise, on the other hand, kept advancing at a steady and unmitigated pace. The tortoise worked hard and eventually persevered.
Any good company would be like the tortoise. So if you find the company of your choice is not doing well in spite of having a good reputation, Buffett would tell you it is just a rough patch. Good companies are never worth parting with. They perpetually pay off in the finish.
Well, guys, that's all I had to inform you concerning Warren Buffett’s main investment principles.
Do feel free to read up on your own. Buffett is an undeniable genius and is worth learning from. His principles and his core beliefs about investing are well-grounded and very practical. So if you intend to try your own hand at investing, follow the master.
Happy investing!
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