Warren Buffet is acknowledged by investors around the world as the world’s best investor. There are certain guidelines or secrets of Warren Buffet which he has adopted while investing in businesses and companies and he has been very generous to let these guidelines be known to the general public. It is a different story that though everyone knows his principles and methodologies, very few actually adopt and execute them.
We look at 7 stock investing secrets of Warren Buffet that he implemented in his lifetime.
1. Invest in quality businesses, not stock symbols
Most of the small time investors and even educated ones for that matter, look at the historical performance of a stock to conclude how much money they can make. Sitting back and hoping for a northward movement of the stock you buy is designed to fail. The stock after all belongs to a company and if that company is sick, so is your investment.
Warren Buffet refers to this as trying to play bridge without looking at the cards. Instead, Warren Buffet suggests investing in sound companies that will grow over a period of time and will be able to thwart off challenges from peer companies.
Technical and fundamental analysis are a science and how to choose quality businesses to make money is still a hot favourite pastime for many today. Buy sound companies whose stock will grow healthily over a period of time, not just stock symbols.
2. Don’t invest for ten minutes if you’re not prepared to invest for ten years
One of the secrets of Warren Buffet is, simply put, this amounts to long term investing. He says that the real value of a good company is unlocked over a extended period of time and not really over a short one. So he suggests investing in a company possibly for the entire life term.
One could possibly end up buying a good company stock at a higher price in the short term but over a long period of time, the market will present many opportunities to buy that stock cheap.
The exciting thing about long term investing is that you are bound to beat the fluctuating market. Don’t buy stocks to make a profit in the short term.
3. Scan thousands of stocks looking for screaming bargains
Warren Buffet is known to look into annual and quarterly reports of thousands and thousand of companies to find the real bargain. He doesn’t use a computer or a calculator they say and is able to remember details about companies that others don’t.
His intent to look at so many stocks is not to find a company doing just average earnings, instead he looks for investments that are a steal by a huge margin.
4. Calculate how well management is using the money they have
Warren Buffet looks for companies with good returns on equity while employing little or no debt. This is measured by two ratios called return on equity and return on capital.
The measurement of return on equity and capital is a direct indication of how the businesses are run by the management of the company.
If you want your stocks to perform well, the company has to perform well as well and for that the management has to use equity and capital wisely. Keep track of money usage by the management of the firm.
5. Stay away from “glitter” stocks
More often than not, you will find stocks on the Sensex that will catch your fancy for having a high trading volume or a wild fluctuation in its price over a day or week or month.
Studies have shown that most of the investors put their hard earned money is such stocks and lose more than they would had they put in normal stocks that were not grabbing the headlines.
In Buffet’s words – “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
Stay away from the headline making stocks.
6. Calculate how much money you will make, not whether the stock is undervalued or overvalued according to some academic model
There are many models available to find out the actual worth of a stock and whether it is over valued or under valued. But remember that none of these can be relied upon. They can work sometimes and they will fail sometimes but they will not consistently succeed. Using any model does not guarantee that you will end up making money on the stock.
It is because of these reasons that Warren Buffet focuses on expected return from the stock, not whether the company is undervalued or overvalued. He aims for a minimum 10%, anything above that is a bonus.
7. Remove the weeds and water the flowers — not the other way around
Most of the investors will want to cash out when the market price of their stock goes a few notches higher than their purchase price. In case the stock price goes below their purchase price, they will want to hold on with the hope that the price will eventually go up.
Studies have shown that investors would be better off selling their losers and keeping their winners and not the other way around. This is what is referred to as “remove the weeds and water the flowers, not the other way around” . There are exceptions to this but the general idea can work wonders.
Are you aware of any more stock investing tips that Warren Buffet uses ?
Very good tips. There are many more that are out there that are good.
@Jigar, Jigar, why don’t you share with us so that it helps everyone.
Make saving your habit as is eating. Don’t save the money you are left after your expenses, try to spend the amount you are left with after saving money.
That is fair enough Amit. If you are saving and investing money per goal based investing, you can blow the rest away 🙂