Warren Buffet is popular as world’s greatest investor but actually even if he is worth $36 billion it is not true. He does not buy or sell stocks like a common teacher paying $155 against mutual fund or an accountant who invests 5% of salary in a fortune company.
Warren Buffet’s investing principles are totally different. His investment advice is timeless and agrees to have many errors in his life. Below are some Warren Buffets investment tips to help investors avert common traps that can jeopardize their financial goals.
- Invest in business you understand
Never get involved in overly complex investments. Majority of public-traded companies belong to sectors, you have no direct or little experience. It does not mean you cannot invest in market sectors you are not aware about but it is necessary to approach with caution.
For example, if you don’t find technology field comfortable to understand than it becomes hard to predict or identify next technological development. There are many other companies rather than hanging on a sector hard to understand.
Simple investment mantra – Stay within your competence circle to avoid errors.
- Never compromise business quality
Passing a complex company and sector is straightforward but recognizing quality business is very challenging. Buying stock of an underperforming company with an expectation to soon get decent profit is actually a foolish decision according to Buffet Warren. He regards Berkshire Hathaway his worst investment. In rough times, problems go on surfacing one after another, so returns are low and soon the initial investment value gets eroded.
Therefore, he quotes, ‘It is wise to buy wonderful company at fair price instead of fair company at wonderful price’. High earnings on tie-up capital allows business potentially multiply their earning faster in comparison to low-returning businesses. Overtime, the intrinsic value of such businesses increases.
Simple investment mantra – Time is friend of wonderful business.
- Buy a stock with an aim to hold it for long
Buy stocks of high-quality business with a goal to hold it long. Warren Buffet has embraced buy & hold approach with several of his positions. As the intrinsic value of quality businesses increase overtime, so he advises investors to stay patient.
Simple investment mantra – Stock market is projected to transport money from active traders to patient investors.
- Extensive diversification is risky
Diversification helps to mitigate the portfolio risk but according to Warren few quality equities held for long term is rewarding. Several investors diversify their portfolio excessively because of anxiety as well as ignorance.
Holding 100 stocks is practically impossible for a trader to monitor or analyze current happenings that can impact these companies. It also means that mediocre stocks are also held, which can dilute impact from high quality holdings.
Simple investment mantra – Slim the excessive portfolio and concentrate on high quality holdings.
- 99% financial news is noise
Majority of conversations and news headlines are designed to generate buzz. Often stock owners listen to the hyped-pundits and act on their comments without second thought. Warren Buffet says that the companies he invested in are more than ten decades old and have experienced practically each kind of unimaginable challenges but have withstood the time test successfully. They also had gloom & doom news originated but are still standing.
Simple investment mantra – Be selective with news you opt to listen and think cautiously prior acting.