- How to invest like Warren Buffett
If you want to study and understand Warren Buffett in his own words, how he sees business, how he sees investments, I think this is the best resource.
Warren Buffett's five principles and rules for investing.
1. Never lose money
Never lose money. Rule number two: never forget rule number one.
You have to understand Warren Buffett doesn't just look at the return on investments.
He also looks at the return of investments. Meaning, how safe is this investment gonna be in five years, 10 years, and 20 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, approach investing like they're going to Vegas, like they're gamblers, they're not investors.
They go into the stock market thinking about,
"Well, you know what?
"How quick am I gonna make a quick buck, right?
"How quick am I gonna make my money?"
Versus having that long-term deal.
You hear this from gamblers a lot, right?
They go to Vegas and say,
"You know what, I'm gonna bring three thousand dollars
"and I'm gonna stop once I lose all that 3K."
A lot of people approach the stock market, same attitude.
"I'm gonna lose X amount of dollars,
"then I'm gonna be done."
Well, that's not how you approach investing.
2. Stick with long-term value investing
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 could see he doesn't change a whole lot. He doesn't focus on the daily ups and downs in the marketplace.
You see, Warren Buffett focuses on long-term value investing. In fact, he is famous for saying, when people ask him,
"Hey Warren, how long should I hold a stock?"
And he replies, "Our favorite holding period is forever."
3. Invest like you're buying the entire company
So, instead of your thinking 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, hm, is this a good deal? Now, if you think it from that perspective, there's a lot of hype you would 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, I'm going to sell at that price."
You're thinking about that particular stock price. Instead of thinking,
"I'm gonna buy the entire company.
"Would I pay that kind of price?
"Would I pay that kind of multiples for the company?"
Chances are, no. If you're not gonna spend that kind of money, an outrageous price, for the entire company, 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."
4. Invest in companies with competitive advantages
To Warren Buffett, the world's divided into two, great businesses and everything else. In fact, during an interview he said,
"I look for simple businesses with a consistent performance "and favorable long-term prospects."
Now that's very profound to think about it. Simple businesses.
What makes a business great according to Warren Buffett?
Well first, a great business is simple. It's simple to understand what they do. It's simple to understand their business model.
How do they make money?
So think about Enron. We're not so sure how it makes money. But you and I can probably be pretty accurate exactly how Coca Cola makes money, how Starbucks makes money. It's very easy to understand the business model.
Second, a great business has brand recognition. When you think about cola, you think about Coca Cola. When you think about blue jeans, you might think about Levis. When you think about fast food, you might think about McDonald's. When you think about running shoes, you might think of Nike.
A business that has brand recognition, those are great businesses. It means that they occupy mind share in the consumers' minds. When consumers think about buying certain types of products, they think of that brand.
Well, that's a great business.
Third, 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're not competing based on price. They're competing based on value.
Now that's very critical because it means over time, this business will earn more and more and more profits and there are enough profit margins for them to grow.
Well, Warren Buffett looks at that as well. Warren Buffett says,
"If you've got the power to raise prices
"Without losing customers to a competitor,
"You've got a very good business."
If you have to have a pre assession to even increase your price by ten percent, well then you've got a terrible business.
5. Keep cash on hand
One of the things I've learned from Buffett that I love is when he says, "Be fearful when others are greedy "and be greedy when others are fearful." – Warren Buffett
Now, you cannot take advantage of the marketplace, if you don't have cash on hand because when they say the 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 news, they're afraid,
"No one's buying.
"The economy's bad." And they're so afraid.
What they don't understand, if you study history, there are always cycles. Right? 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's trying to do that. It's very difficult. But if you have a long-term view and you follow some of these principles, then the likelihood of you being successful as an investor is much higher.