10 key lessons from Warren Buffet on investment approach - Motilal Oswal
10 key lessons from Warren Buffet on investment approach - Motilal Oswal

10 key lessons from Warren Buffet on investment approach

Whether you are into investing or not; it is highly unlikely that you have not heard the name of legendary investor, Warren Buffett. Apart from being one of the wealthiest self-made men of the 20th century, Buffett is also a virtual university when it comes to investing wisdom and learning investment strategy. The AGM of his company, Berkshire Hathaway, is a sort of pilgrimage for value investors and his annual report is a storehouse of investment wisdom for value investors. So what is the investment advice from Warren Buffett that we can glean from all these sources? Are there any Warren Buffett’s investing tips in India. Here are 10 lessons from Warren Buffett that will stand you in good stead through your investment journey..

1.  Invest in what you understand
Back in the late 1990s the whole investment world was gravitating towards IT and telecom companies but Buffett chose to stay away. His logic was that technology was too complex to understand and hence he preferred to keep away. Similarly, he kept away from banks and financials during the sub-prime crisis. This focus helped Buffett avoid burning a big hole in his portfolio during two of the biggest meltdowns in the US markets. The moral of the story is to stick to your knitting, even if it is drab and boring.

2.  Read, read and read extensively for new investment ideas
Buffett is a voracious reader and he recommends that all fund managers and serious investors should devote a good part of their day to reading. That is the only way to understand new trends and get new ideas. Otherwise you tend to stagnate and that is not great news for investing, which is by definition a highly dynamic activity.

3.  Diversification is good but only up to a point
We all believe that diversification is essential to reduce our risk of concentration. Buffett does not dispute that but feels that diversification only works up to a point. After that you do not have risk reduction but you have risk substitution. That is an important lesson for those who try to diversify by creating a mindlessly large portfolio of stocks with very limited incremental benefits.

4.  Don’t follow the herd; you will never make money
When you are alone you are lonely but that is your best bet to make money in equities. The idea is not to act contrarian for the sake of it. The idea is that when you are convinced then don’t change your mind just because the entire market is acting in the other direction. It is this conviction in yourself that will hold you in good stead.

5.  Always take a very long term approach to investing in equities
Buffet loves to say that his investment time frame is “forever”. While that may be an exaggeration to drive home the point, some of his favourite stocks like Coca Cola and American Express have been in the Berkshire portfolio for a better part of its life time. It is this long term approach that will help you in equity markets across the world. After all, equities are never about the short term.

6.  Time in the market is more important than timing the market
Nobody caught the top and the bottom of the market consistently and nobody will! The idea is to commit money when you are convinced about value. As long as you can buy good stocks at reasonable valuations and attractive prices, it is good enough to create wealth over the long term. In fact, it has been empirically proven that perfectly timing the market is not only impossible but also unnecessary as the incremental benefits are just about marginal.

7.  Treat stocks the same way as you would treat a bargain sale of furniture
This is an interesting thought process to glean from Buffett. He says that when we go for a furniture or apparel sale, we try to get the best bargains. On the contrary, when it comes to stocks we try to pay higher prices when the momentum is favourable. Buffett’s suggestion is to buy when you see value and treat equities in the same way as you would approach a basement bargain sale. Chase value at lower prices!

8.  If it is simple; please illustrate with a piece of chalk
This is a test that Buffett runs a lot of sales persons through. Buffett believes that if you have a great idea then you must be able to explain it to a fifth grader with a piece of chalk. If you have to hide behind algorithms and tomes, then the idea is surely not worth the while. The takeaway is that big money was made by Berkshire on stocks like Coca Cola based on very simple ideas.

9.  The earlier you start off on equities the better
This is an extension of the time factor in investing. The sooner you invest in equities, the more time you have to earn returns. And the more time you have then the more returns are earned by your returns. That is called the power of compounding and that works perfectly in case of equities. That forms one of the premises of Buffett’s investment philosophy.

10.  Be paranoid about losing money
Great investors are paranoid about losing money. That does not mean that Buffett has not booked losses. Recently, he had a disappointing outing with IBM but the point is that when you make a loss it is time to seriously introspect what is wrong and avoid these mistakes for the future. It is OK to lose money occasionally in equities as long as the lesson is not lost!

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