Warren Buffett's Advice on Investment

Invest Only in What You Know

One of the most common mistakes that beginners make is that they invest in companies they don't fully understand. Many people work in multiple industries before they begin investing in the stock market. However, most companies that operate business are still too complicated to understand. Not everyone can forecast the success of a biotechnology company or a drug pipeline except for those who have worked in there. So, if it takes more than 10 minutes for you to get a clue of how a company makes money and the people who worked for it, move on to something else. You'll be able to avoid a lot of mistakes by staying within your area of expertise.

An Advice from a Billionaire Stock Investor

Target High-Quality Businesses

Warren Buffet has learned this principle over the last 50 years. He focuses mostly on buying high-quality businesses which have promising chances of continued growth. At one time, Buffet bought a textile manufacturing company called Berkshire after being enticed by its low price. This, he says, is one of the worst investments he's ever made. In a difficult business, as soon as one problem is solved, another one crops up. This leads to low returns which erodes the value of the initial investment. One must consider these things before investing in the stock market.

After learning this, Warren Buffet said - "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."   

Companies that have high returns have a higher potential of compounding their earnings faster than those of lower-returning businesses. This leads to the rise of their intrinsic value over time.

Hold On to the Stock that You Have 

According to Warren Buffet, "If you aren't thinking about owning a stock for ten years, don't even think about owning it for ten minutes" and "Time is a friend of a wonderful business".

Quality businesses earn high returns thus increasing their value over time. These fundamentals take years to have an impact on a stock's price hence, only the patient investors are rewarded.

Constant buying and selling of stocks takes away a substantial amount of returns as a result of taxes and trading commissions. If you sit tight, you'll enjoy the long-term benefits of your stock investment.


Diversification Can be Dangerous

A little bit of diversification is alright and it serves an individual investor well. Less than 10 investments are fine. However, too much diversification is recipe for failure. "Diversification is a protection against ignorance. It makes little sense to those who know what they're doing."- Warren Buffet  

Some investors diversify their portfolios too much to a point of having 100 stocks as a result of fear or ignorance. This makes it impossible for them to keep tabs on all the events affecting the companies they've invested in. If you own more than 50 different stocks, you should slim down your portfolio and focus on high-quality stocks.

Most News is Noise

All news outlets have a segment on financial news. However, the aim of these news outlets is to create unnecessary buzz around a particular topic. You can't trust what they say. Warren Buffet always warns investors about following the advice they listen to on the so-called news. Small matters are often magnified which temporarily affects the market prices. The named companies always get back on their feet after such minor drawbacks. Hence you should be selective of the news you hear or even act on. 

Investing is Not Hard

Most people believe that only sophisticated people can invest in the stock market. Well, Warren Buffet says, "You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ." The hard part is consistently beating the market and sidestepping behavioral mistakes. There's no magical formula or rules that will help you with this. Mistakes have to be made but you have to learn from them. Stay away from self-proclaimed gurus who claim to have systems that offer a hands-off, rules-based investing system.

Investment Strategy for Beginners

Differentiate Between Price and Value

"Price is what you pay, value is what you get" - Warren Buffet. In most cases, stock prices vary depending on investor emotions but that doesn't change a company's future stream of cash. Investors should concentrate on high-quality companies which have the most reasonable prices in the present.

Excellent Investments are Boring

Investing in the stock market is not a get rich quick scheme. As a matter of fact, it aims to grow existing capital over a long period of time. Although it's boring to wait, always go for quality business that will compound over a long period of time. Don't try to invest people with impressive investment moves. As Warren Buffet puts it, "Beware the investment activity that produces applause; the great moves are usually greeted by yawns".

Only Listen to those You Trust

Warren Buffet often emphasizes on investing in competent and trustworthy management companies. He carefully selects his managers and business partners. This is because their actions are what make or break an investment in the years to come. Look out for "gurus" who prey on investors' fears and unrealistic expectations to make themselves some quick money. They usually apply normal stock-market standards while exhibiting a great deal of confidence. The best thing is to focus on facts, stay on course and set realistic expectations. Understand the technical analysis of stock market trading.

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