Simple life lessons in regards of investing from Warren Buffett, whose as per the annual records shows returns +20% per year, since 1965 (Berkshire Hathaway). So, let’s see some of the investment advice he and his team follow throughout the years to have this spectacular return on investment.
Think and play the long-term game
"Do not hold a stock for 10 minutes unless you are willing to hold it for 10 years". Everything depends on the investors’ circumstances, but stocks should not be bought unless it is expected to be held for a very long and extended period. Investors should be prepared financially and psychologically to hold their stocks long-term and never panic on a daily quote check if the stock goes down 5-10%. Price corrections, or even sometimes market crashes are inevitable to happen.
"Opportunities come infrequently", therefore any investor should be alert and be prepared to invest at any time. Some of Warren Buffett’s investments are being held for more than 30 years (Coca-Cola, American Express). Having a long-term mindset for investments is really important.
At the same time, investors should focus on the quality of their purchase
"It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price". Having said that, an investor should not always follow the crowd. It is extremely important not to rush and buy a stock or invest somewhere just because everyone else is buying. The best way is to find the underlying value of an asset, do your research and once confident to invest there, ignoring all the ‘financial market gurus’ who promise profits and becoming millionaires overnight.
There is no easy and quick money, unless it’s a lottery ticket
Investors should do their own research and the result should reflect the quality of the investment. Once there is a solid plan and a belief that a stock or a project will be profitable, then an initial investment following with compounding over time may lead to the desired outcome. Compound interest and dividend reinvestment is also a very common technique used either to invest more money to an existing investment or to diversify a portfolio.
The stock market is the only place people run out of the store during a sale
Stocks will go up, stocks will go down, but the real goal is to be in the game as long as possible. The point is to buy something that has value, and a reasonable price and wait for over ten or twenty years. Market corrections are normal part of investing, but since there is a real value at the asset we bought, a drop should not deviate us from the initial plan. Sometimes, during corrections and when prices are falling it would be wise to strengthen our position even more, since we are going to add more to our investment and for a cheaper price.
Economic moat is important
This refers to a business’s ability to maintain competitive advantages over its competitors to protect its long-term profits and market share. There are many ways in which a company creates an economic moat which in turn allows it to have a significant advantage over its competitors. This can be a cost advantage, size advantage (economies of scale), or even soft moats.
A great example for economic moats is Apple, a company which is famous all over the world for its creativity and bringing products to the market which did not exist before (e.g. iPod, iPad, iPhone) and even the products are considered expensive for an average consumer, people who have bought an Apple product stay loyal to the brand and their next purchase is an Apple product too.
Start early, be patient and invest in yourself
An early investment in a project having of course a long-time horizon plan may give an investor an opportunity to earn positive returns since the investment will have longer to recover from downturns and market turbulence and uncertainties. There will be many opportunities for an investment, but the right time is very important. By stating ‘the right time’ we mean the entry point for an investment.
All possible financial circumstances should be considered and once everything is ready an investor should decide to apply his/her plan. The best investment is to develop yourself and grow your knowledge. Find something that you are good at, train, learn more and more about it, and become exceptional at it. This will be an ability that can’t be taken away from you.
Although Warren Buffett is known for not investing in tech companies, his mindset and his developed wealth as a value investor cannot be denied. Summarizing, we can state that long-term investments and the ‘’value’’ of an asset are the most important factors to consider before applying an investment strategy to any Financial Market.
The value of an asset may not be right away recognizable, but it may take time to appear to the consumers. Once it is common knowledge, then things will be easier and profitable for early investors but not for the ones who will be willing to join at that time.