When Warren Buffett speaks, everyone listens. Considered as the world’s greatest investor alive, he never shies away from offering advice to fellow investors. Over the years, he has amassed a personal fortune of $72 billion and his company, Berkshire Hathaway, is valued at $212 billion. Here are a few pearls of investing wisdom offered by Buffett over the years:
Don’t invest in a business you don’t know
If you are determined to invest your money in stocks of a particular company, you ought to understand the business of the company first. For example, consider putting your entire family’s net worth in a single business. Would you go into the business? Or would you say, “Gee, I’m not sure I know enough of the business. Let me try something else.” The same applies to the stock market. Only invest in a company’s stocks if you thoroughly understand how their business. If you don’t, it doesn’t matter. Just move on to the next one. You don’t need to necessarily have every good stock in your portfolio.
Invest for the long haul
Buffett famously said: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” As an investor, you need to select companies based on the underlying value of the company. This is known as value investing. It ensures that you won’t have to indulge in panic selling when the market plunges. Since you are looking at long-term prospects, you wouldn’t need to pull out your money prematurely. If you have chosen stocks based on their worth, they are certain to ensure a good return, even if they face a bad day or two.
Churn your investments
It is impossible to find stocks with the best potential on a regular basis. Careful analysis is the key but it can take time. Meanwhile, it will do your money no good to wait idly. Instead, invest in stocks that you consider safe. These include blue chip companies which are stable and pay regular dividends. This way, you can see your investments grow while you search for the big performers. Then channel the income from these investments to fund your future investments.
Past performance is an unreliable indicator
Never buy a stock purely on its past performance. It is not a guarantee of future returns. It is quite easy to portray numbers in a way that a stock’s performance is much better than it actually is. You need to consider other factors before you make your decision. Metrics like after-tax returns, cost-to-return ratios, and performance in downtime are important too.
Invest in a low-cost index fund
Buffett has been doling out this advice for years. In his 2013 letter to shareholders, he writes that investing in index funds would help investors attain superior results over a long time period. Compared to a regular investor, you can stand to gain greater returns by regularly investing in low-cost index funds.
Look for growth not yield
Many investors tend to target stocks that offer a higher yield than their current investments. While it is not wrong to seek a company that offers high dividends, you must exercise caution. Ask yourself these questions: what is my investment goal? Do I want long term benefits or short-term returns? As it was mentioned earlier, it would be wise to go for long term benefit if you are investing in stocks. High returns can be quite misleading. Consider a company that uses all its cash to pay out quarterly dividends. It can be an indication that the company has reached the maturity stage of its life cycle and lacks future growth prospects. Instead of reinvesting its profits in growth avenues, the company may be trying to please shareholders with dividends.
Invest in yourself
Finally, here’s a philosophical gem from the great investor. “Invest in as much of yourself as you can,” Buffett told investors to in a CNBC interview. You need to find avenues to improve your talents and skills. This will make you more valuable and increase your purchasing power, regardless of which industry you work in. And unlike other investments, nobody can tax your skills or steal them. The returns are quite large too. Whatever you invest in yourself, you receive tenfold.