Warren Buffett is a mentor for a lot of traders. Why shouldn’t he be? After all, his investing principles have earned him the title of the world’s greatest investor. His way of working is a little contradictory to many others in the arena of online trading. He doesn’t invest the way it’s depicted in the popular media. He is the kind of investor who likes buying and holding.
Buffett has taught us that once you buy a stock, hold it no matter what. Forget that there is a recession in the economy or it is at its boom. Whether it’s good times or bad, you’re supposed to hold onto the stock.
Buffett doesn’t just buy stocks for the sake of holding them. He buys them for a specific reason. When those reasons no longer exist, he sells the stocks. He not only looks for good prices but sound management and a competitive advantage. He shared his opinion that companies such as IBM, Sears, and GM are great but they cannot stay competitive for long. Therefore, these companies shouldn’t be a part of your portfolio.
Why not learn from the pro himself and invest the right way? Here are 5 key principles to begin with:
1. Invest In What You Know
Before investing in a stock, it is very important to understand what a company does and how it makes its money. Ever wondered why Buffett has always avoided investing in tech stocks? It’s because he does not completely understand their business model. He sticks to what he knows.
This also explains why he prefers investing in Berkshire’s stocks. It represents a diverse mix of stocks such as utilities, banking, and insurance and consumer products. All of these are businesses that Buffett understands very well. No wonder he has invested a significant amount of money here.
“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.” – Warren Buffett
2. Before Buying a Stock, List the Criteria
It makes sense to buy stocks on the basis of criteria, right? After all, you’re ensuring that you don’t end up investing in something unfavorable. You could be searching for stocks in a certain industry with a set price to earnings ratio.
Buffett never makes the price of the stock the sole criteria of his buying decision. Sometimes, great companies end up taking a price dip because of the market situation. However, holding onto these stocks could still turn out to be favorable.
3. Be Aggressive During Tough Times
Generally, it’s not recommended to time the market. But if you’re a long-term investor, you’ll be fine no matter when you buy. This means that even during the tough economic times, you shouldn’t settle down. Keep on looking for opportunities. This is what Warren Buffett does because he knows that things will eventually turn around.
Buffett is known for capitalizing on opportunities during and after the great recession. Bank of America investment is one of the best examples of this. In his latest annual letter, Buffett said that “dark clouds will fill the sky almost after every decade. But it certainly will rain gold.” So don’t despair, keep on investing.
4. Don’t Worry About the Day to Day Market Movements
Along with other tips, Buffett also said that you must only buy a stock if you are comfortable holding on to it in case the stock market shuts down for a decade. Since you are holding onto the stocks for 10 or more years, there is no point in losing sleep over the minor swings.
Ignore the headlines about the trade wars, the government shutdown, and other chaotic news. Instead, you focus on learning the potential growth of your company over the course of time. The fact is, stock prices keep on changing, but it’s not significant if the company’s business still has a bright future.
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” – Warren Buffett
5. Buy Buffett’s Stocks
Buffett keeps everything simple when it comes to investing. If you don’t want to do the guesswork and research to figure out which stocks to buy, simply invest in the stocks Buffett already owns. But, make sure you understand the business. Buffett discloses his holdings publically each quarter. He has capital in companies such as Wells Fargo, Apple, and Bank of America. To keep things simple, you can buy the shares of Berkshire Hathaway itself.
Warren Buffett hasn’t been successful all by himself. He has a team of investors who help him do legal work and give him investment tips. He’s also a part of an advisor network because he understands that an investor needs all the help he can get. It’s amazing that a billionaire like him still listens to others.
Now that you know how to invest like Buffett, it’s time you prepare your investment strategy. These principles are not hard and fast criteria, they are simply a discipline strategy all investors should stick to. Along with these, you can use math, technical analysis, fundamental analysis, and even stock charts to make a decision. You may not end up a billionaire, but you will avoid losses and make more profits than your fellows.