Important lessons that you should learn from Warren Buffet before investing:
Mr. Warren Buffet currently stands at number 4 in the billionaires list among 1,810 billionaires from around the world with a net worth of US$71.8 billion as of July 2020, according to the Forbes 30th annual guide of the world’s richest personalities. Also famously known as “Oracle of Omaha”, he is one of the most respected personalities, and has been a guide and great source of inspiration to numerous investors around the world. His philosophy of investing is pretty much clear and logical which makes it attractive for the investors. Mr. Buffet has been writing letters to the shareholders of Berkshire Hathaway and the investors since a long time on his investment traits. Below post will take you through some of the investment lessons from Mr. Buffet that will help you in becoming a successful investor:
1. Review your mistakes and learn from them
When Mr. Buffet was 11 years old, he bought 3 particular stocks at $38 per stock and sold them at $40 per stock thereby making a marginal profit. However, soon after he sold the shares, the value of the stocks rose approximately to $200 per stock. It made him regret for selling them so soon. Later he referred this experience as a lesson to have patience in investing.
He says investors should be open to the changes and accept the mistakes if any of their decision go wrong. In a letter written to the shareholders in 1989, he quoted: “It’s good to review your past mistakes before committing the new ones.”
2. Don’t try to Predict Stock Market Movements
Mr. Buffet in his 1978 letter quoted: “We make no attempt to predict how security markets will behave; successfully forecasting short-term stock price movements is something we think neither we nor anyone else can do.”
He believes, investors should not get carried away by the short-term market movements because it is impossible to predict the movements in the short run. He says that an investor should always look upon the long-term performance of the stock.
3. Think from a Long-Term perspective
Another key takeaway is: to stay in the market and keep a focus on companies that look stable over a long-term horizon; which is very much visible in his approach. Mr. Buffet purchased over one billion dollars of Coca-Cola stocks in 1988, assuming that its strong brand value will safeguard its business from the competitors and after 27 years i.e. in the year 2015, the Coca-Cola’s stock has grown by 16 times which depicts his success of long-term investment philosophy.
He avoids selling stock even if the stock price goes up shortly after the purchase. In his view, long-term investors should avoid booking quick profits from the market and in fact, they should continue to buy good companies. In a letter written in 1989 he mentioned: “Buying a stock at a low price can give you a chance of earning decent profits due to ups and downs in the short run of the business, but it may not be profitable in the long-term and called this approach as the ‘cigar butt approach’ to investing.”
4. Emphasis on Return on Capital Employed
Mr. Buffet uses return on capital employed (ROCE) to measure the attractiveness of any business. According to him, slow capital turnover along with the low sales profit margin produces a scanty return on capital.
5. It’s always apt to be aware of what you’re getting into before you are into it
Mr. Buffet purchased a department store named as Hochschild Kohn, shortly after acquiring Berkshire at a substantial discount from the book value. However, three years later he had to sell the business at a price which he paid to buy the business. He called this approach as ‘bargain-folly’.
He then quoted: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
6. Institutional Investors may not always be Right
Mr. Buffet advises investors to form their own view on investment opportunities and buy stocks that are available at lucrative prices. He believes that the investors should not follow the institutional investors for their investment decisions as the market trends also impact them.
7. Do a thorough Research before you invest
It is always apt to do some study before you get into something. For instance, Berkshire in 2009 bought a major railway operator, ‘Burlington Northern Santa Fe’ during a major recession and the decision seemed perilous. However, the company’s fundamentals were suggesting otherwise and the decision to buy ‘Burlington Northern Santa Fe’ looked obvious as the company’s revenue grew from 18 billion dollars in 2008 to 23.2 billion dollars in 2014. Research has helped Mr. Buffet in a long run by paying off huge profits on his investments.
8. Don’t be overoptimistic while projecting a business
He suggests the investors to be conservative while looking for business prospects during good times. The investors are advised to take a comprehensive view of the business along with knowing about its competitors before concluding that the business will perform well in the future.
9. Your investment is in businesses, not stocks
In his letter written in 2013, Mr. Buffet referring to two of his properties, quoted: “I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”
By this he meant to say that an investor should focus more on the business and try to understand the information such as its assets and liabilities, revenues and expenses, etc. rather than just focusing on the stock value.
10. Short listing of stocks
Mr. Buffet does not believe in overpaying for a stock, no matter how much attractive it looks. He is against the logic of buying good stocks at whatever price they are available. In his 1978 letter, he had quoted that he is committed to a business which:
1. Possess favorable long-term perspectives.
2. He can understand.
3. Is Operational by the competent and honest people.
4. Is Priced attractively.
11. Strengthen your area of expertise
Mr. Buffet is a longtime value investor and invests in stocks which have good intrinsic value even though the market undervalues them. This approach at times takes years to reap off the benefit but with this approach, Mr. Buffet has always been certain that if not a big gain he will at least get some amount of benefit. His success is very much visible from the business he has generated through this philosophy by investing in companies such as Gilette, Coca-Cola and Geico.
12. Quality Management is a key to any Business
Mr. Buffet says investors can put their money in the business, but they do not have control on the management of the company. The company where you decide to invest should be run by the trustworthy and efficient managers. He holds high regards for the managers who do not run blindly behind the sales number and are willing to cut loose if the business is not a success.
He quoted in his 1978 letter: “If major factors in the market don’t know their real costs, the competitive ‘fall-out’ hits all; even those with adequate cost knowledge.”
13. Invest in Ideas
Mr. Buffet talks about investing in companies which have a realistic business plan and competitive advantage over others. Merely having a great intellect does not mean that the company is worthwhile. He quoted: “Try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later one will.”
14. Proclaimed Financial data may be Delusive
According to Mr. Buffet, the reported financial numbers as per the accounting rules may not always depict the real picture of the business and should not be trusted entirely. The numbers can be viewed as a close approximation of the reality.