At age of 87, Warren Buffet’s answer to best investment advice was: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”
This makes us belive that experience is the ultimate key to become a successful investor.
Between 1965 and 2016, Warren Buffet’s company Buffett’s Berkshire Hathaway (BRK.A) returned an annualized profit 0f 20.8 % to all it’s investors, compared to S&P’s 9.7 % return.Considering this, many investors hang on his words and advices on succeding in the market.
Another of Warren Buffett’s most famous quote is : “Be fearful when others are greedy, and greedy when others are fearful.” This advice, essentially is telling us to go against the majority of investors, but this strategy is more difficult and needs a lot of experience to be applied correctly.
But what about those who are new to investing? What if you don’t have any experience in trading?
Fortunately, the best thing about the internet is that information can be found easily with just a PC or Laptop, and we can use it to learn from investors that DO have experience , like Warren Buffett himself or other great investors around the world.
Understanding How Markets Behave
First thing we need to learn is to understand how the Markets behave.Stock prices rise, reach a peak point and start to fall, then they start rising again.When stock prices tend to rise, investors get greedy and jump in the trend, by buying shares to those stocks.Warren Buffet categorizes them as “greedy” investors, investors that chase the return and seeking profits from an uprising stock market.
This kind of “greedy” investors chasing a rising stock market tend to forget one of the most important aspects:
If the price is too high, you may end up paying a lot more than the stock is really worth and you are likely to lose money when the market corrects and prices begin to fall back.
In a rising stock market the price tend to get inflated, then the price can start to go south and the investors tend to do what it’s called “panic selling”, making the same investors that bought at a high price selling at a lower price, driving the price of the asset even lower.
Diversification isn’t always a good idea
The majority of good investors are repeteadly telling us how important diversification really is, but Warren Buffet tends to disagree with this idea, thinking that diversification is actually for people who don’t know much about investing.An experienced investor is able to pick only the good stocks and should have faith on his actions.
Diversification happens when you don’t really know what stocks to invest in, and you are trying to minimize risks by investing in more than needed.By diversifying, those investors could reduce the return by investing in less important stocks.
Instead of diversifying, it’s better to wait for the best opportunities to buy good stocks and take full advantage of them.
Rectify your Strategies
Another secret to a good investing strategy is to understand the real value of the stocks you decide to invest in.
If stock prices are substantially above their historical norms,while other investors get too enthusiast, you should be cautious.Paying too much for your financial assets might not turn out to be a good ideea, as you could lose a lot of money when the price will fall down.
Daytrading might not be such a good ideea
Buffet things that the secret to getting a better return on your investments is to buy stocks and forget about them.
He belives that buy-and-hold mentality is the key to better returns.He himself holds some stocks for decades, and has been proved to be a great investment strategy.
If you end up buying a good stock and the value of that stock will greatly increase over time, it will compound and increase exponentially the longer you hold that stock so in the end you will be rewarded for your patience.
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for ten minutes.”
By constantly buying and selling stocks, you will end up paying a significant ammount of your returns in the form of trading commissions and taxes so just holding them for a long time will prove to be a better ideea on the long-term.
Warren Buffet thinks that index funds are a smart investment
We all know there are no guarantees in the stock market, but Buffet belives that index funds are a very good investment and solid advice that every investor can follow
Index funds hold every stock in an index such as the S&P 500, including big companies such as Apple, Facebook,Microsoft or Google.
There are too reasons behind this logic: Index funds are inexpensive, meaning that anyone can invest in them and aren’t tied to the success of a single entity, greatly reducing risks.
“The trick is not to pick the right company,” Buffett says. “The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently.”
Trust yourself to be a successful investor
One of the hardest things to do is to trust your investment decisions.Investors tend to think that others are right and you are wrong.The key to success is to study and always belive in yourself.You need co overcome the fear of losing and you should never pay attention to what others are telling you.You should always make your own investment decisions in order to be a winner.
Only make investments that you understand
Another major and common mistake from investors around the world is that most of them don’t think a bit before making an investment.
Buffett wanrs that we should never invest in businesses that we don’t really understand.Before deciding to invest in a stock of a company, we need to first understand how the company makes money
Buffett cautions that you should never invest in businesses that you don’t fully understand, if it is too complex to understand, just look for other stocks to invest in.
Bonds Are Not Good Long-Term Bets.
Some investors think that bonds are sure things compared to stocks, but bonds share many forms of risks.
While bonds can be good to protect your investments in a short period of time, they are awful investments compared to stocks on a long term.
“Given that pathetic return, our bonds had become a dumb – a really dumb – investment compared to American equities. Over time, the S&P 500 – which mirrors a huge cross-section of American business, appropriately weighted by market value – has earned far more than 10% annually on shareholders’ equity (net worth).”