THE world loves nothing better than a success story. And Warren Buffet, one of the richest men in the world, fits the bill perfectly.
How did a quiet man from the American Midwest start with USD 100,000 and build it to $35 billion? The answer is terribly simple.Through stubborn adherence to the time-honoured fundamentals of value investing.
If you had invested $1,000 in Warren Buffet's Berkshire Hathaway stock in 1965, we would be worth roughly $5 million today. If you missed this investment opportunity, author James Pardoe gives you a step-by-step guidebook to follow Buffet's footsteps in the book, How Buffet Does It.
Here are some pointers from it with my comments as well.
1. Choose simplicity over complexity
When investing, keep it simple. Do what is easy and obvious. If you don't understand a business, don't buy it.
2. Make your own investment decisions
Don't listen to brokers, analysts or pundits. Figure it out for yourself. Become a value investor. It has proven to be a very rewarding technique over the long term.
3. Maintain the right temperament
Let other people overreact to the market. To succeed in the market, you need ordinary intelligence. But you also need the temperament to help you ride out the storms and stick to your long term plans. If you can stay cool while those around you are panicking, you can surely prevail.
4. Be patient
Think 10 years rather than 10 minutes. Don't dwell on the price of stocks. Instead, study the underlying business, its earnings capacity and its future.
If you ask, 'How long must I wait?', Buffet would say, "If we're in the right place, we’ll wait indefinitely."
5. Buy business, not stocks
Once you get into the right business, you can let everyone else worry about the stock market. Business performance is key to picking stocks. Study the long term track record of any company on your buy list.
Buffet looks for following five main things before investing in a company.
~ Business that he can understand
~ Companies with favourable long term prospects
~ Business operated by honest, competent people
~ Businesses priced very attractively
~ Business with free cash flow
Don't think about stock in the short term. Think about business in the long term.
6. Look for a company that is a franchise
Some businesses are franchises. A franchise generates free cash flows. And free cash flows are one of the requisites that Buffet has listed above. Go for it.
7. Buy low tech, not high tech
Successful investing is rarely a gee-whiz activity. It is less often about rockets and lasers and more often about bricks, carpets, paint, shaving blades and insulation.
Do not be tempted by get-rich-quick deals involving relatively complex companies. For example, high tech companies. They are the most unpredictable in the long run.
Look for the absence of change. Look for the business whose only change in the future will be doing more business. Example: Gillette Blades.
8. Concentrate your stock investments
Follow the Noah's Ark style of investing. That is, a little of this and a little of that. Better to have a smaller number of investments with more of your money in each.
Portfolio concentration -- the opposite of diversification -- can also focus your mind. If you are putting your eggs in only a few baskets, you are far less likely to make investments on impulse or emotion.
9. Practise inactivity not hyperactivity
There are times when doing nothing is a sign of investing brilliance. As hard as this is to believe, it is true. Sometimes, it is hardest to just sit by and watch. Be a decade's trader, not a day trader.
10. Don't look at the ticker
Tickers are all about prices. Investing is about a lot more than prices. It is about value. It is about wealth. Abstain from looking at share prices every day.
Study the playing field and not the scoreboard. Know the value of something rather than the price of everything.
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