What Warren Buffett Tells You about the Investing Approach
It helps to follow other successful investors in stock trading, if you can customize their strategies to your requirements. And here’s the greatest of them. TradeZero Ocean Place Cable Beach, Unit #1 Nassau, Bahamas
With features such as commission free trading and advanced stock trading software, online broker dealers are attracting the average individual to try their hand in the stock market. Before starting out, there are inevitably dreams of attaining big success or becoming a millionaire. And you’ve got so many millionaire investors to get inspired from. But all these investors follow certain principles with utmost discipline, and that’s what you need to do as well. Arguably the most successful investors of all time, the Sage of Omaha, Warren Buffett is also most quoted, since he has used quotes to give people an idea of the trading principles he’s followed that have helped him to multiply his investment gains and become a millionaire in the process. So following his principles could perhaps get you to those heights, if you adapt them to your requirements and stay disciplined towards your approach. And a great way to learn about his gold standard investing principles is to follow his quotes, which are quoted by Motley Fool analyst Matthew Frankel. So let’s get started. The first quote that comes to mind is what Buffett holds the dearest too: “Rule No. 1 is ‘never lose money’. Rule No. 2 is ‘never forget Rule No. 1.’” That shows how much value you need to give to the capital you put in, and while it is important to realize that you could lose money in investing – as indeed many successful investors including Warren Buffett have, you must take that very seriously. Preserving your capital must be your primary goal. “Price is what you pay. Value is what you get.” No prizes for guessing what this reveals about Buffett’s investment objective. It’s no secret that Buffett is a value investor, and the best at that. Value investing gives you long-term rewards, rewards that last, unlike short-term gains. The key to figure this out is to realize the difference between the price of a stock and its real value. Not all stocks are priced according to their value. Value depends a lot on the fundamentals of the company, and if you could end up paying a low price in relation to the stock’s value, it’s a winner. Probably related to this is another quote of Buffett that attracts our attention:
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“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Don’t just fall for a stock because it is mouthwateringly cheap. Value is important, and what the company’s profile, fundamentals and future prospects are, need to be given major consideration. It is worth paying more for a well-run company with growth prospects rather than buying a hopeless one just because it comes cheap. You don’t want to sink with that stock. So a great deal of research and analyst opinions are important before you decide on a stock. But at the same time, Buffett also says that: “For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.” So while Buffett believes you need to pay more for a great company, you also must take care not to pay too much. That’s because when you pay an excessively high purchase price, it nullifies the benefits of favorable future performance of the business. So what are the things you need to consider when you select companies? Remember the fundamentals we mentioned earlier? There is also something known as a competitive advantage. Buffett has something to say about that: “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” What advantages does the company have that could give it an edge over its competitors? Is its business model significantly advantageous and streamlined, giving it a cost advantage? Is its brand name particularly strong? Margin of safety could be a competitive advantage too. The safety margin gives the company some cushion during adverse economic conditions such as recessions. Buffet says: “On the margin of safety, which means, don’t try and drive a 9,800-pound truck over a bridge that says it’s, you know, ‘capacity: 10,000 pounds’. But go down the road a little bit and find one that says, ‘capacity: 15,000 pounds’.”
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That sums up the point well. The buy-and-hold strategy is something that can help you build up your financial position gradually. And that’s something that has certainly worked for Warren Buffett. There are plenty of his quotes that affirm this. But here’s one that says it well: “Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.” There’s another quote that drives home the point well: “Someone’s sitting in the shade today because someone planted a tree a long time ago.” So here’s wishing a lifetime of shade for you with these tried and tested principles. Follow the Oracle of Omaha, but also keep your investing goals in mind. You’ve got advanced online stock brokers out there to help get started with the stock market.
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