The legendary Warren Buffett needs no introduction. Every year, during the AGM of Berkshire Hathaway, fund manager and investors travel to Omaha. Of course, there are Selfies with Buffett but also for the words of wisdom from the Oracle of Omaha. What we have done here is to summarize the key ideas of Buffett into 7 investment lessons. Read on.
1. Invest in simple stories
One of the things that Buffett tells any fund manager is to illustrate their ideas with a piece of chalk. According to Buffett, if you idea is great then it should be simple enough to illustrate with a piece of chalk. For example, Buffett never bought internet companies during the boom of 1999. He may have looked silly but did manage to save his capital when the meltdown happened. Similarly, he stayed out of banks and financials during the sub-prime crisis. The logic simple; only invest in stories that you can understand. Otherwise, there is no harm in even giving good ideas a skip!
2. You don’t make big money by diversifying
Now this may look a tad contrasting with what you learn all these years. Diversify your risk, reduce your risk etc. What Buffett talks about here is something entirely different. According to Buffett, the alpha or excess returns will come when you bet on a handful of stocks over a longer period of time. Buffett consistently bet on stocks like American Express, Wells Fargo, Coca Cola, and GEICO etc. For a portfolio of his size, he held very few shares. Interestingly, today his largest shareholding is in Apple, a story he had taken a long time to buy into.
3. Herd mentality is your ticket to investing failure
Never go with the herd, they will always mislead you. The rule of the market is that the majority can never outperform the market and therefore the majority must be wrong, by default. Don’t become contrarian for the sake of it. Understand where the crowd is getting it wrong and then play the contrarian game. For example, Buffett talks about becoming fearful when others are greedy; and becoming greedy when others are fearful.
4. Once you buy a stock, don’t worry if the market shuts for 5 years
Buffett loves to give this analogy. Many fund managers and investors give too much importance to the price ticker. Volatility is part and parcel of the investment game and you cannot take decisions based on the price ticker. Once you buy a stock and are convinced with the stock then just hold on to it and don’t worry about the short term fluctuations. It is not that Buffett holds every stock to perpetuity. Where he feels he has committed a mistake, he is quick enough to exit the stock. IBM is a classic example.
5. Timing the market is impossible, so just focus on time
Buffett chides people who try to focus on finding the tops and bottoms of the market. According to Buffett, that is not only difficult but also meaningless. Over long periods of time, finding tops and bottoms will make a very small difference to your returns. Effectively, the trouble is just not worth it. Instead, investors need to give the stock time to play out its full story. Time in the market matters more than timing the market!
6. Buy stocks like you are at an attic sale
Buffett points out a very anomalous behaviour among investors when it comes to stocks. When it is about buying furniture or household goods, most people tend to look out for bargains and attic sale programs. The same person when he becomes an investor tries to buy expensive stocks with a view to sell it when it is more expensive. According to Buffett, your approach to investing should be exactly like you approach an attic sale. Bargain hard, get the best deals and value is yours for the asking.
7. Just be paranoid about losing money
This is Warren Buffett’s golden rule. He keeps repeating that you should be paranoid about losing money. It does not matter how small the loss is, but the moment you are paranoid about losses, you will do everything in your power to avoid such a situation. That will automatically improve your investment performance.
