Warren Buffett, often referred to as the “Oracle of Omaha,” is one of the most successful investors of all time. His wisdom and investment philosophy have inspired countless individuals, from seasoned investors to young traders looking to make their mark in the financial world. While Buffett’s success story is often associated with long-term value investing, his advice extends beyond just picking stocks. Let’s explore some of the timeless wisdom Warren Buffett has shared with young traders.
Never lose money
One of Buffett’s most famous tips is “never lose money”. In fact, he once said: “The first rule of an investment is ‘don’t lose money’. And the second rule of an investment is ‘don’t forget the first rule’. And that’s all the rules there are.” This approach has implications for how you invest. Buffett’s quote suggests that instead of looking for the highest upside, you should be looking to avoid loss first and only then look at gains. That’s a different mindset from investors who view the stock market as a slot machine.
Pick Businesses, Not Stocks
When a business does well, the stock should eventually follow. Buffett seeks out businesses that exhibit favourable long-term prospects when he’s choosing investments. Does the company have a consistent operating history? Does it have a dominant business franchise? Is the business generating high and sustainable profit margins? One of Buffett’s rules for success is that he never buys stock in a company unless he can write down the reasons he’s willing to pay a specific price per share.
Don’t fear market crashes and corrections.
The obvious goal of stock investing is to buy low and sell high, but human nature can compel us to do the exact opposite. When we see all of our friends making money, that’s when we feel like we should try to make money, too. And when stocks markets crash, it’s our nature to get out before prices drop any further. Buffett loves it when stock prices drop since it creates opportunities to buy at a discount, which explains why 2022 has been a particularly active year. If you were shopping at your favourite store and suddenly learned that the entire store’s prices were 20% lower, would you panic and run away? Of course not. Buffett embraces discounts on his favourite stocks and says, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
Don’t bet on individual stocks
As an incredibly successful investor, Buffett is strongly against the practice of stock picking, stating: “The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P and to do it consistently, and to do it in a very, very low-cost way. You do not want to ever get the impression that you can pick stocks.”
The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.
Buffett touches on the value of temperament for a successful investor rather than intelligence. Rather than trying to go with or against the crowd, investors should analyze what’s going on in the market, regardless of who likes what stock. By focusing on the objective facts, investors can make decisions that are relatively free of emotion and make better choices.
You don’t get paid for activity, you only get paid for being right.
Buffett reminds investors that being an active trader who constantly switches from position to position isn’t likely to produce great returns. Activity can feel productive in the world of investing, but the only thing that matters is whether you were right in your analysis.
Our Favourite Holding Period Is Forever
Warren Buffet is the ultimate exponent of a buy and hold philosophy. How long should you hold a stock? Buffett says you shouldn’t own it for 10 minutes if you don’t feel comfortable owning it for 10 years. He held on to the bulk of his portfolio even during the financial crisis, which he referred to as an “economic Pearl Harbour.”
Pay attention to fees
When it comes to investments, costs are very important. This is why Buffett preaches the advantages of low-cost index funds and warns investors to pay close attention to fees. He says: “If returns are going to be 7% or 8% and you’re paying 1% for fees, that makes an enormous difference in how much money you’re going to have in retirement.”
It’s safe to say that Warren Buffett is a legendary investor. He’s accomplished this by sticking to some very basic rules for buying and holding investments in his portfolio. His methodology for picking stocks involves a great deal of research aimed at establishing a fair price for a particular stock. To paraphrase Buffett, the market is there to accommodate your investing strategy but only when the price is right.