Warren Buffett who is one the wealthiest person in the world right now is keen to share his tips via Berkshire Hathaway shareholder letters or in interviews. And today I want to share his best tips what comes to investing. Warren has long experience working in the financial industry, and his advice’s are worth of listening.
“Risk comes from not knowing what you’re doing”
I have heard this so many times,” you will lose all your money” in the stock market. Why are these people saying this? They don’t what stock market is and how it works. Yes, there are risks (like in every investment), but you can handle the risk by diversification and learning. Do you know anybody who has been a master at some skill first time he/she tries it? Yep, neither have I. More you learn, better you will be.
“Someone’s sitting in the shade today because someone planted a tree a long time ago”
What is the best asset in investing? It is time. With time you can maximize the impact of compound interest. Investing should always be done long-term and investing period needs to be more than ten years.
When to start? The correct answer is if you didn’t start yesterday start today.
“Only buy something that you’d be perfectly happy to hold if the market shut down for ten years”
Don’t be a day trader! You just ended up burning all your money to commissions. Every stock purchase should be made long-term.
Search companies which have a clear competitive advantage (number 1 or 2 in their field) and are stable (see financials). It would also be nice if their field would exist in coming years.
“Price is what you pay, and value is what you get”
You should know what the value of a company is. So how to evaluate a company?
One of Warren’s mentor Benjamin Graham has written an excellent book called Intelligent Investor. In this book, you can find examples how to calculate the intrinsic value of the company. But be prepared, you might study 50 companies but only invest in one or none. Be humble and wait for the right pitch.
Warren quite often refers to this book, and it is a must-read for every investor.
“Buy assets which pay you steady income while you own it”
You should only acquire assets which pay you dividends, royalties or money while you own it. These can be stocks, bonds, funds, rented real estate, etc. If your “investment” does not pay you anything (like paintings), this is not investing at all it is speculation. Here is Warren’s opinion about gold:
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”