With a net worth of about $96 billion, Warren Buffett, nicknamed the Oracle of Omaha, is the sixth wealthiest person on earth. The name of Warren Buffett synonyms with financial success, prosperity, and of course, right investments.
Warren Buffett is one of the most successful investors to ever live. If you had invested just $1000 in Berkshire Hathaway when Buffett took it over, you would have over 21 million dollars today, even with the recent crash. Today Berkshire's average return on capital, around 20%, exceeds the S&P 500 with an average return of 10% annually.
So how did Warren Buffett get such great results and become one of the richest men in the world? These results came from investing in companies and following a set of key principles discussed below. Here are the top five timeless investment tips from Warren Buffett that are relevant even in 2021.
One of the primary mistakes that many beginner investors usually get involved in is trading on what they know little about.
According to Warren Buffett's investing philosophy, you must clearly understand how a company and its business model work before investing even a penny. Why would you invest in something that you don't understand and pry that you will get a good return? It's all about investing in something that you know, something that perhaps you are passionate about.
"What many investors invest in today should not be what you need to invest in tomorrow."
Let's say you want to invest in the stock market, that's what you are interested in. Go and buy a hundred books, invest your money in educating yourself before putting a single dollar into any kind of stock. That's how you minimize your risk and maximize your return. Always remember not all progress is measured by ground gained; sometimes progress is measured by loss avoid.
Historically Warren Buffett avoided investing in one of the promising businesses - the technology sector. Even once, he said that investing in a business or industry is absolutely useless if you cannot understand how a company generates profit within.
One famous American investor, Peter Lynch, said: “Never invest in an idea you can't illustrate with a crayon.”
Instead of you thinking of buying some shares or stocks, imagine if you are actually buying the entire company. If you think from that perspective, there is a lot of hype you would avoid. You would not be so excited about a particular stock if you know it's overpriced. Just consider whether you will pay for that kind of multiple for the entire company. Once you determine that the price is outrageous, why would you pay for the stocks?
Warren Buffett said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Apart from getting an investment at a reasonable price, it's essential to qualify the return on invested capital. In simple terms, understand the company's efficiency to get the most out of your investments.
Businesses with high returns have better potency to enhance earnings, thus increasing your business's value over time. Warren Buffett has a beautiful quote based on how time may either help or destroy your business: “Time is the friend of the wonderful business, the enemy of the mediocre.”
Instead of being tempted to get profitable shares of a business to double or triple your earnings, you would better invest in high-quality companies.
The key to successful investing is buying a great company and holding it for long periods. Let's understand why it's so genius.
Imagine you bought Walmart back in 1970 when it was just getting going as a public company. It used a growth rate every year of about 18 percent, which means it doubled every four years. If we go forward to holding on to Walmart, you will double the value of our investment every four years.
First of all, buying and selling stocks may lead you to tax-loss and trading commons. Second, it would be better to buy right and sit tight than expect getting investment returns from a low-quality investment.
Once Warren was asked how long you prefer holding stock, the answer was as simple as the question, "our favorite holding period is forever."
Compounded annual growth rates are the hardest thing to understand, but you will get really successful if you get this. There is nothing on the planet that can produce wealth like a great company that you can buy at a great price.
You probably have heard the wise saying, don't put all your eggs in one basket. Namely, the idiom means that you don't have to risk everything by investing in one idea. The same principle comes in handy when it comes to investing. In simple terms, diversification means reducing risk by branching-out your investments across different instruments. This is intended to maximize your return as an investor and minimize poor performance or bankruptcy risk.
Professional investors claim that diversification in investing is a key component to accomplish long-term financial goals. It lowers the risk of having multiple businesses going on simultaneously than focusing on a really good one.
Many of us trust financial advisors and spend money across every flip and investment we can find: bonds, real estate, commodities, etc. But all of that is really considered by good investors to just be massively over diversifying.
“Diversification is a protection against ignorance." Warren Buffett
Don't get Buffett's philosophy wrong; he recommends diversifying the investment portfolio a little bit, just naturally the way it works. For instance, he put forward the philosophy of concentrated exposure of five to ten business sectors. Warren Buffett has about seventy percent of his money only in six businesses. This hardly counts as diversification.
Once Warren Buffett was asked whether he is upset that the investment markets are going down. He said: "No as I want to buy more of them as it goes down". When you know what you own and know that it's a good business, down markets are a wonderful time to invest.
Many people believe that investing is risky, generally referred to as fear of capital loss inherent in a bad financial decision. However, investing is mainly all about being financially intelligent and having appropriate skills.
Warren Buffett says: "Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ". Definitely, this doesn't mean that you will become a billionaire only by following Buffett's advice. But actually, there is no magical set of rules that may lead you to become a successful investor.
According to Buffett's philosophy, investing is not rocket science, but he criticizes the idea of putting your money in the hands of investing experts that will never reveal the secrets of success.
If anyone claims that his investing strategy will get you tons of money immediately after you pay him a service fee, run away and never turn back. Of course, your financial adviser may have better skills and knowledge of finance and investing. However, you don't need a high IQ to become a successful investor, as usually proven approach, enthusiasm, and willingness to learn beats a smarter brain.
THE FINAL WORD
Investing seems like a wonderful idea. Actually, nothing can be better than making your money grow without doing anything? Instead of wasting your time in the office hustling, just let your money multiply by itself. However, investing can be a quite slippery slope if you don't have sufficient skills and knowledge to make your money work for you.
Every company in the market targets you as a potential investor, and they try to do everything possible to persuade you that they deserve your investment the most. So understanding the basics and considering your investment strategy is critically important to succeeding.
"Risk comes from not knowing what you're doing," Warren Buffett.