Warren Buffet is the greatest investor of all times. He is also one of the best teachers of investing. In his annual reports and interviews he gives priceless wisdom and investment advice. One can learn investment techniques which helped him become a billionaire and one can use them to invest better and reach one’s financial goals sooner. Here are some financials lessons from Warren Buffet.
1) Stock picking is not a hobby
a) To become a successful investor one should put in thousands of hours of study to master the necessary skills to make worthwhile investments.
b) Buffet had read every investment book in his local library by the time he was eleven.
c) If you are not willing to put in time and effort that stock picking requires, one would be better off simply buying an index fund.
2) Invest Unemotionally
a) It is human nature to be emotional but it reduces investment returns.
b) One should think long term and should not panic when the market falls instead one should see drops as buying opportunities.
c) One should learn human psychology to invest better
3) Invest what you understand
a) Buffet stresses the importance of having a circle of competence a clearly defined industry, business model, asset class or other areas that one in expert at and invest only within that circle.
b) Buffet suggests invest in what one understands.
c) One should invest in business where investing factors are knowable.
d) One should know the business in which one has to invest for long term and one should be able to predict what the business will look like in five or ten years.
4) Stock ownership is business ownership
a) When one buys a stock, it is partial ownership in the underlying business.
b) The ownership gives us proportional claim on the company’s future earnings in form of dividend.
c) If a business does well the stock prices eventually follow.
d) Buffet sees himself as a business analyst and not as market analyst.
5) Know what a good company looks like
a) One should invest in business which is easy to understand with consistent operating history, good long term prospects, possibly with some durable competitive advantages or moats, a trustworthy highly quality management team and solid financials i.e. high return on equity and high free cash flows.
b) Find good companies at good price.
c) When value exceeds price, the difference is what Buffet calls margin of safety.
d) A large margin of safety enables you to be successful
e) Buy good companies at great price.
6) Be patient
a) One should be patient while buying and holding stocks.
b) The right mentality in investing should be get rich slow and you buy it at like expensive valuations.
c) It does not work to sell what has not performed well in short term (at a less) and buy what has performed well in short term (price already risen).
d) It is dangerous to try to outperform the market in short term.
8) Be less averse
a) One should follow policy of risk adjusted return.
b) Preservation of capital should be top goal.
c) By always looking for margin of safety, one’s returns will be adequate.
d) Avoid big mistakes and let compounding work its magic over long period of time.
9) Volatility is your friend
a) Being risk averse doesn’t mean avoiding volatility.
b) A widely fluctuating market means that solid business will occasionally available to buy at a irrationally low prices.
c) Buy good companies at a good price.
10) The market is there to serve you, not to inform you
a) Market is often rational and prices are reasonable.
b)Occasionally the market gets emotional or irrational and prices swing wildly in one direction or other.
c) When market is greedy sell at a premium and when fearful one can buy at a discount.
d) Market will not tell about actual value of things instead look for opportunities when prices diverge from underlying value.
11) Think for yourself
a) Financial news programs are more about expectation than investing.
b) There are great investment opportunities in market but they won’t be featured in television channel.
c) One has to do own study and digging.
d) Don’t care if you look like idiot. Ignore the crowd.
12) Be selectively contrarian
a) Become fearful when others are greedy and be greedy when others are fearful.
b) Generally one buys when price is too high and one sells when the price is at bottom.
c) Buy when others are selling and sell when others buy.
13) Learn from the masters
Find some experts who have good track record in investing and who can guide you.
14) Avoid Taxes
a) One should pay taxes one is legally required to, but not more than that.
b) Keep shares for minimum one year as there is no capital gain tax after one year.
15) Do what makes you happy
a) Do what you love.
b) Read quarterly reports of companies and be passionate about investing.
c) If one doesn’t love investing buy a index fund and spend as much time as possible on the things in life that you love.