Legendary investor, Warren Buffett, is a man that needs no introduction.
While billionaires have struggled to maintain their position on the exalted list of the world's richest people, Buffett has been a constant figure in the topmost echelon of high net worth individuals. It is not surprising that his reputation has reached mythical proportions.
His annual letter to shareholders is one of the most closely watched and widely circulated. Every quarter, analysts peruse and screen Berkshire Hathaway's 13-F report to get an insight into Buffett’s mindset and what may be going through the mind of the investing genius.
Several philosophies guide the investment strategies of Warren Buffett.
These philosophies are nuggets that speak to the secret to his success. To the investors hoping to replicate the same measure of success achieved by Warren Buffett, adhering to these philosophies may be akin to religious devotion.
Here are some philosophies which have guided the investment strategy of Buffett. By replicating them, hopefully, you can achieve the same measure of success as him.
Time is a very valuable resource, especially in the world of investing where the law of compound interest performs wonders.
Starting early allows you to take advantage of compound earnings. Warren Buffett began investing when he was 11-years-old and he has stayed invested ever since. This explains why he has been able to accrue so much on his principal.
Starting early also enables you to take losses and gives you more flexibility when investing. Taking losses in situations such as corrections or sell-off is crucial because you can take advantage of the drop in share prices to buy cheaper shares.
When you have a longer time frame, you are also able to take more risks which improves your chances of increasing return on your capital.
This is where time works its wonders again on your portfolio performance.
Buffett says his favorite time to hold a stock is forever. He believes you shouldn’t own a stock if you don't feel comfortable holding it for at least 10 years. Even during the recession, a period Buffett refers to as ‘financial Pearl Harbor’, Buffett stuck to his portfolio.
This strategy runs contrary to the dominant thought today where people expect to make astronomic gains in a day. We have seen this play out in the rise of meme stocks and cryptocurrencies such as dogecoin.
However, seasoned investors know that it takes time to build wealth because time spent in the market is far better than timing the market.
Investment should be viewed as a marathon, not a sprint. $1,000 invested in Apple shares 30 years ago is worth $204,000 today. $1,000 invested on Amazon stock at its IPO in 1997 would be worth more than $1.2 million as of 2020.
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Buffett insists that investors should have a circle of core competence.
This entails investing in companies or sectors that you know very well. By understanding a company’s business model, its product, management, how it generates revenue, you are more likely to evaluate the business better and make sound investment decisions.
This explains why Buffett does not invest in sectors that he does not know, like tech. Buffett shared the opinion that if a business does well, the stock eventually followed. The only way to ascertain if a business would perform well was by knowing it.
Perhaps more important than understanding your circle of competence is knowing your boundaries.
As Buffett put it: "The size of that circle is not very important; knowing its boundaries, however, is vital."
A firm understanding of what you know is good, but knowing what you don’t know is very important because it prevents you from taking unnecessary risk and making poor investment decisions
Buffett doesn’t pay much attention to the daily ups and downs of the stock market.
He doesn’t get caught in the euphoria of fear that pushes investors to take knee-jerk actions. On the contrary, he is known to show an incredible amount of patience waiting for investment opportunities. When they show themselves, he takes maximum advantage of them.
He also sticks to his stocks unless there is a fundamental change to the company. Buffett saw the stock market as a place where thousands of companies are priced, but he cautioned investors not to mistake price for value.
To him, it is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Lifelong learning is a prerequisite to long-term success in any facet of life.
Warren Buffett has been credited with being a lifelong learner. Even his friend and partner, Charlie Munger, attributed the success of Berkshire Hathaway to Buffett’s quest for continuous learning and referred to him as a “lifetime learning machine”.
Your investment choices are a reflection of what you know. However, what you already know can only get you thus far. In a dynamic field such as the financial market, the importance of continuous learning can never be overstated.
Buffett even suggested that investors should invest in index funds if they could not dedicate themselves to the rigor of quality research or lacked the understanding of the market.
The mistake most people make when investing in stocks is not knowing when to stand aside.
It can be tempting to invest all your money in stocks, especially in a bull market. Many people get carried away by the excitement in the market which compels them to trade frequently. However, Warren Buffett believes that holding cash is also a position.
Despite the wild euphoria in the stock market in 2020 which saw share prices reach astronomic levels, Warren Buffett stayed away from the market for most of the year. Holding cash allows you to take advantage of opportunities when they present themselves.
Everyone wants to be as wealthy as Warren Buffett, but few have the discipline to apply his principles when it comes to investing.
Buffett's consistency on the list of the world’s richest people is a testament to the efficacy of his strategies. A common theme that runs through the tips above is mastering your emotions. If you can master your emotions, you can be a master at investing.