Given the recent turmoil in financial market, I was inclined to pick up books that I had previously read about the greatest investor of all time – Warren Buffet.
2 of his favorite quotes that I love most are:
Rule #1: Don’t lose money
Rule #2: Don’t forget Rule #1
Be fearful when others are greedy and greedy when others are fearful
Investorpedia also wrote a nice article about how Warren Buffet thinks about investing, which we can summarise into the following points:
1. Think of Stocks as a Business
Stocks/shares/equities are more than just a piece of paper!
2. Increase the Size of Your Investment
But, do your homework first and not to over-diversify.
3. Reduce Portfolio Turnover
Means less capital gains tax and transaction/trading fees and costs. Plus, you get more peace of mind then to keep on monitoring daily stock price fluctuations.
4. Develop Alternative Benchmarks
Fundamentals, fundamentals, fundamentals.
5. Learn to Think in Probabilities
How likely is earnings growth over a period of five or 10 years is much more apt to ride out short-term fluctuations in the share price?
6. Recognize the Psychological Aspects of Investing
Make rational judgements (based on fundamentals), instead of emotional thinking.
7. Ignore Market Forecasts
Instead, put more focus onto efforts of isolating and investing in shares that are not currently being accurately valued by the market
8. Wait for the Fat Pitch
What if you were to have the chance to buy only 10 stocks in your whole lifetime? Which stock would you really really buy? The logic is that this should prevent investors from making mediocre investment choices and hopefully, by extension, enhance the overall returns of their respective portfolios.
All these theory will only be theory without looking at which shares Berkshire Hathaway are holding. If you look at what Warren Buffet is holding in his portfolio, you will get a better understanding of why that investment was made and how the points mentioned above fit into the mentality of a smart investor.
I think it’s easy enough to pinpoint just a trend on Warren Buffet’s portfolio.
– They are good companies with recognized brands such as Coca Cola, WalMart, P&G, GE, AMEX etc
– They are involved in insurance, banking, transportation, utilities, retail, food etc. Nothing special, looks boring at first glance, but people need them are they keep on returning good revenue and dividends back to their investors again and again.
Investing, it seems, is no different from other areas of knowledge. It can be boring, it’s about fundamentals, doing your homework, practising and having the correct mindset.