2021-12-26
Investment Strategies of Mr. Warren Buffett
Fundamental
Mr. Warren
Buffet is the CEO of Berkshire
Hathaway and is worth at least $100.6 billion. As of 2021, he is the
seventh wealthiest man in the world. As a result, there are some crucial things
to learn about investing when you first begin, because not every investment
generates cash flow. In addition, many successful entrepreneurs are excellent
stock market investors because they understand that investing rather than
saving allows them to grow their wealth. From his own experience, Warren
Buffett has presented some investing rules and strategies for investors to make
a good investment for long-term returns. So, if you are someone who is new to
investing or is looking for some tips while doing the same, this may definitely
help.
Beginning with, the two
golden rules; according to Buffet, are: a) Never Lose Money and b) Never Forget
Rule 1. And to support the same, Let us now take a look at the secret
investment rules that he has revealed to us-
1. Never
depend solely on one source of income-
He famously said, “If you
don’t find a way to make money while you sleep, you will work until you die.’’
Here, Buffet has stated that one should never rely on a single source of income
because diversifying one's income helps to maintain financial stability. So, if
you already have a job, it makes sense to take on a part-time job, but Buffet
has stated that investing your earnings will generate cash flow over time as a
passive income.
2. Understand
the difference between price & value –
Practically, a company’s
stock prices may swing with investor’s sentiments but that doesn’t been that
company is bad or its future cash flows will also be unstable. He follows the
rule of buying stocks at a price below their intrinsic value & holding them
until the price reflects the true value of the company.i.e., he firmly believes
in Price is what you pay, Value is what you get. However, it is important to
remember that just because a stock is inexpensive does not mean it is a good
investment.
3. Select the
appropriate news to focus on -
So Have you ever imagined
a pandemic causing a worldwide lockdown and affecting the majority of
countries? No, right? This is because none of these can be predicted
with any certainty. As a result, valuable investment opportunities are said to
arise as a result of market corrections or individual stocks that become
bargains. But still, if none of the companies on your list match your
investment goals, putting your money on hold is a better option than to invest
just for the sake of investing during such times.
4. Invest as
if you're buying the entire company -
As we know, equity stocks
also give you an ownership in the company & therefore Mr. Buffet advises
investors not to think of investments as ‘stocks’ but to think of buying a stock
as buying an entire company. To put it another way, invest in a company because
you want to own it, not because you want the stock to rise in value.
5. Buy &
Hold Strategy -
We might have heard this
a several times that Quality investments earn returns & grow exponentially
over the time. And Perhaps, Warren Buffet is the strong believer of the same.
'If you're not willing to own a stock for ten
years, don't even think about owning it for ten minutes,' he famously said.
Essentially, he believes in investing rather than trading in the stock market,
and he also believes that short-term volatility can affect stock prices,
affecting a significant portion of your returns.
6. Sell off
the holdings at the right time –
There may be times when
the company's fundamentals no longer remain the same, i.e., the stock price of
the company is affected due to internal factors rather than external factors
& therefore it can be the right time to sell off that holding from your
portfolio. With that, he also believes that successful investing entails
picking good stocks at the right time and sticking with them as long as they
continue to be good companies.
7. Never invest
money into a company you don't understand –
Buffett's best investment
advice is to avoid investing in businesses that you don't understand. Investing
in something unknown can be extremely risky, so this investment rule
necessitates a thorough understanding of your investment, as a bad investment
can quickly wipe out your efforts and money.
8. Reinvest
Your Profits-
Let me relate this with an
example of Mr. Buffet himself. During high school, Buffett and his friend Pol
bought a pinball machine to put in a barbershop. They made a lot of money, so
they used the profits to buy more machines and put them in more stores.
Finally, his friend sold the business, and Buffet began investing the proceeds
in the stock market.
Therefore, if your
investment returns are satisfactory; you should reinvest them to increase your
income and accumulate significant wealth. Furthermore, many investors have
increased their wealth by employing Buffett's investment strategy.
9. Watch
Small Expenses-
Buffett always prefers to
invest in companies run by people who think about the little things. He also, as is common practice, focuses on every
single value of a business, and he once checked 500 sheets to see if the
company owner was being defrauded & he actually was. Here, it isn't greed because
business should always be conducted in a fair manner.
10. Analyze
the Risks-
When you're growing up,
it's natural to take risks. When it comes to investments, taking risks is also
necessary. However, Warren Buffett believes that there are two major risks that
investors should avoid at all costs. The first is, possibility of long-term
capital impairment & the second is the risk of a low rate of return on
investment.
So to summarize, these are some of his investing principles that may assist an investor in making more informed investment decisions. Let's take a look at his top ten holdings to see what we're talking about -
a) Apple(AAPL) – Talking about this one, It's no surprise that Apple is one of Warren Buffett's most valuable stock holdings. The business has a proven track record of high earnings, returns, and management techniques. It'll only be a matter of time before the latest iPhone makes its way into almost everyone's hands around the world.
b) Bank of America (BAC) –
Investing in Bank stocks is probably Buffet’s favorite place to put his money
in. Bank stocks pay out very generously to their stockholders during economic
expansions. Also, to add in; recessions are unpleasant, but they only last a
few months in comparison to years of economic expansion.
Since many banks profit
from their customers, the BAC stands out in a few ways. It is very
interest-sensitive, which means that those who invest in BAC will benefit the
most from an increase in interest rates when compared to other banks.
Furthermore, by encouraging customers to use online banking and merging its
branches, BAC has significantly reduced its miscellaneous costs.
c) American Express(AXP) –
Buffet's investment in American Express
is yet another example of his fondness for financial stocks. Buffet's stock
holdings in American Express date back almost 28 years, making it the
third-longest in his portfolio. The strategy, like that of the BAC, is to wait
for economic prosperity and a boost in the global economy before collecting
interest and credit card fees.
d) Coca-Cola(KO) – He's
been a shareholder in this beverage for 33 years. Coca-Cola's growth may
have slowed rather than accelerated, but its dominance in the beverage industry
remains unchallenged. You can always find a bottle of Coca-Cola around the
corner, no matter where you are in the world. The company sells more than just
beverages and has a wide range of products.
e) Kraft Heinz(KHC) – This
isn't one of Buffett's best investment deals, but it is still one of his best.
However, the coronavirus pandemic has
unexpectedly benefited Kraft Heinz. With the majority of people staying at home
with their children and working, quick, easy-to-prepare meals became a
necessity. Kraft Heinz products have proudly stood in grocery store aisles in
such circumstances.
f) Verizon Communications
(VZ) – Verizon is a
telecommunications conglomerate with a global reach. They share a corporate
part of the Dow Jones Industrial Average and have a strong holding in the
telecommunications industry. (The Dow Jones Industrial Average is the most
well-known share index in the USA).
g) Moody’s Corp. (MCO) – Moody's
Corporation is a financial and business services company based in the United
States.
h) U.S. Bancorp (USB) – U.S.
Bancorp is an American bank holding company situated in Minnesota, Delaware,
and Minneapolis. It is the founding company of the US Bank National Association
and is currently the fifth largest American banking institution.
i) DaVita HealthCare Partners
(DVA) – This company provides outpatient services to those in need of Kidney
dialysis. With nearly 2800 branches
across the United States, it is the largest bank in the country. It has also
expanded to ten additional countries. It has a market share of 37 percent in
the dialysis market in the United States of America.
j) Chevron Corp (CVX) - Chevron
is a multinational energy corporation. It was founded in the United States and is now headquartered in
California, with offices in nearly 180 countries.
Overall, Mr. Buffett teaches that finding "wonderful companies" with "long-term value and fairly priced stock," as Buffett puts it, is the first step in replicating his investment strategy. The next step is to stop hesitating and begin investing.