Warren Buffett’s 5 rules for investing:
I’ve spent quite a lot of month’s in studying Warren Buffett’s investment philosophies and strategies and on of the book that I recommend you to read is “THE WARREN BUFFETT WAY” and another thing which I did alongside is that I have read his annual shareholder letters to all the Berkshire Hathaway shareholders.
If you wanna study and understand Warren Buffett in his own words of how he sees business, how he sees investments, I think that’s the best resource. So today I’m gonna share with you Warren Buffett’s 5 principles and rules for investing.
Rule No 1: Never lose money
You have to understand Warren Buffett doesn’t just look at the return on investments. He also looks at the return of investment. Meaning, how safe is this investment gonna be in the next 5-10 years and Warren only invests in what he understands.
Even though there are so many opportunities come across his table, and some of those are tempting, but Warren doesn’t look at those. He only invests in what he understands. You see most people approaching like they’re going to Las Vegas like they’re a gambler, they’re not investors. They go into the stock market thinking like “Well, you know what, How quick am I gonna make money?” versus having that long-term deal.
We hear this from gamblers a lot right, they go to a casino and say, you know what I’m gonna bring $3000 in and I’m gonna stop once I lose all that $3000. A lot of people approach the stock market with the same attitude. “I’m gonna lose X amount of money and then I’m done”. Well, that’s not how you approach investing.
Rule No 2: Stick with Long Term Value Investing
Well, this is not sexy, but Warren Buffett’s been preaching and talking about this for years, and now after 40 years you can see his wealth compounding every year. And he talks about pretty much the same thing. You can see he doesn’t change a whole lot. He doesn’t focus on the daily ups and downs in the market place. You see, Warren Buffett focuses on long term value investment. In fact, he’s famous for saying, when people ask him, “Hey Warren, how long should I hold a stock?” and he replies, “Our favourite holding period is forever.”
Rule No 3: Invest like you’re buying THE ENTIRE COMPANY
So, instead of you thinking of buying some shares or buying the stock, imagine if you’re actually buying the entire company. Would you pay what you paid for the company, the share prices? If you calculate, hmm, is this a good deal.
Now, if you think it from that perspective, there’s a lot of hype that you’ll avoid. You would not be so excited and get all psyched up and hyped up about a certain stock that you know is overpriced. Thinking about it from a perspective of speculation, you’re like, you know what maybe I’ll buy it at this price, and sell it at that price, You’re thinking about that particular stock price. Instead, think like, I’m gonna buy the entire company, Would I pay that kind of price? Would I pay that kind of multiple for the company? Chances are, no. If you’re not gonna spend that kind of money an outrageous price, for the entire company, then why would you spend an outrageous price for the stocks? Think about it.
Warren Buffett says, “It’s far better to buy a Wonderful Company at a Fair price than a Fair Company at a Wonderful Price”
Rule No 4: Invest in Companies with Competitive Advantages
To Warren Buffett, the world is divided into two, Great Businesses and everything else. In fact, during an interview, he said: “I look for a simple business with consistent performance and favourable long-term prospects”. Now that’s very profound to think about. What makes a business great according to Warren Buffett? Well first,
- A great business is simple :
Simple to understand what they do, simple to understand how they make money, well let’s think about Enron. We’re not sure how it makes money. But you and I can probably be pretty accurate exactly how Coca-Cola makes money.
It’s very easy to understand their business model.
- A great business has a Brand Recognition :
When you think about cola what comes to mind Coca-Cola, or When you think about blue jeans you might think about Levis. A business that has brand recognition those are great businesses. It means that they occupy mind share in the consumer’s mind.
When consumer’s think about buying certain type of product’s they
They think of that brand. Well, that’s a great business.
- A great business has Pricing Power :
It means this business has the power to increase prices without losing a lot of customers. It means they are the leaders in that industry. They are competing based on price. They are competing based on value. Now that’s very critical because it means this business will earn more and more profits.
Warren Buffet says “If you have the power to raise prices without losing customers to a competitor you’ve got a very good business”.
Rule No 5: Keep Cash on Hand
One of the things I’ve learned from Buffett is when he says “Be Fearful when others are Greedy and Be Greedy when others are Fearful” Now you cannot take advantage of the marketplace if you don’t have cash on hand because when they say market correction, usually it’s unpredictable. So how do we take advantage of it? We gotta have capital. And the best time to buy a stock is when there is a bear market that you know there’s blood, right, on the street. That’s when you go in. That’s when you can buy good companies, buy good shares at a discount.
But most people because of fear, because of the hype, because of the media, because of the news, they’re afraid ”Oh my god, no one is buying, The economy is bad” and they’re so afraid. What they don’t understand if you study history, there are always cycles. In the economy, there are always cycles. Now you’re not gonna time it at the very bottom of the market and get out at the top. Everybody is trying to do that. It’s very difficult, but if you have a long term viewing and if you follow some of these principles, then the likelihood of you being successful as an investor is much higher.
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