"A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable problem." - Warren Buffett
Wednesday, 17 June 2020
The Double-Dozen Buffett Rules For Wealth Creation
By Venkata Sreekanth Sampath
This post has 24 guideposts on investing culled from the investing principles of Warren Buffett. These are extracted from the book, How Buffett does it by James Pardoe.
1. Simplicity rather than complexity: When investing, keep it simple. Do what is easy and obvious. Don’t try to develop complicated answers to complicated questions. The degree of difficulty does not count in investing. Look for long-lasting companies with predictable business models. If you do not understand a business do not buy it. Buy at a reasonable price in terms of its future earning potential. Then hold on to the stock for ever. You do not have to do extraordinary things to get extraordinary results: keep it simple, make your own investment decisions and read Graham, Buffett and Munger.
2. Make your own investment decisions: As investors we have two choices, we can buy asset classes passively( stocks, bonds, cash, gold, real estate, etc) and hold them for the long-term or we can find the true value of an asset and buy it at a price that is lower than the true value. Most of us are suited for the passive approach. If we want to go for the value-finding approach, we need to become a value investor. This means understanding businesses and understanding market prices. You have to know how to value a business and buy a decent amount of that business when it is undervalued and hold for the long-term. You should not listen to brokers, financial analysts or pundits on television who usually have vested interests.
3. Have the proper temperament: For the passive investor, this means buying regularly over many decades and never selling at a market bottom. For the active investor, it means to hold great businesses for long periods of time. It means not to panic if the stock you hold falls by 50%. It means to never make an investment decision because others tell you to do so. It means to be greedy when others are fearful and be fearful when others are greedy.
4. Be patient: Think 10 years rather than 10 minutes. If you are not ready to hold a stock for a decade, then do not buy it. If you follow this discipline of patience, you will amass wealth. Successful investing means buy and hold. You have to find a few great companies and sit on your ass. It is a mistake in investing to be too fretful. Patience is part of the game. When you buy you buy as if the market is going to be closed for the next five years and you are going to hold the investment for the rest of your life. Buy good businesses, keep an eye on their business performance and not on the price. If you buy the right things, you can hold forever.
5. Buy businesses, not stocks: When you buy and hold you have to buy the right business. If you cannot find which is the right business to buy, then you should buy the whole market. When you buy a stock, you buy a part of an actual business. Even when you buy an index fund you are buying the business of a country or region or even the whole world. It is not a piece of paper. Business performance is the key to picking stocks and you should study the long-term track record of the business you want to buy. If you want to buy a business, then you should look for businesses you can understand. They should be doing the same thing they were doing a decade back and should be doing the same thing in the future. Look for certainty, not glamour. You can only understand such businesses. The businesses should have favourable long-term prospects, be run by honest and competent people and be available at a reasonable price. You should think about the business long-term rather than the stock short-term.
6. Look for companies that are franchises: Warren Buffett likes to buy companies with durable competitive advantage. This is what we mean by a franchise- they have a deep moats. They sell products that are needed or desired, not overly capital-intensive, seen by its customers as having no close substitute and not subject to price regulation. Search out such fortress like firms that stand out from their competitors. Buy them when they become reasonably priced and do not sell them at all.
7. Buy low tech companies not high-tech ones: High tech companies may have rapid growth but long-term sustainable growth in these companies cannot be predicted. Look for companies that do not change apart from doing more business. Avoid businesses in changing industries. Invest in “old economy” businesses. Remember that it takes decades for a company to become great. The companies that become great are those that are involved in making products that do not go obsolete with time.
8. Concentrate your stock investments: When you are convinced of a strong business’s prospects, be aggressive and add to your position rather than buying your fifteenth or twentieth stock on your list of possible investments. When putting together your stock portfolio, aim to own no more than 10 stocks. Make sure they fit Buffett’s criteria. Be courageous. Portfolio concentration can help you to focus your mind wonderfully as you are less likely to act on impulse or emotion.
9. Practice inactivity, not hyperactivity: Doing nothing is often a sign of investing brilliance. Do not trade for trading’s sake. Frequent trading is a hallmark of overactive investors, who tend to wind up with more losses than gains. Be a decades trader, not a swing or day trader. Don’t mistake activity for achievement. Beware of hidden costs. Don’t trade often. When in doubt, be quiet.
10. Don’t look at the ticker: Tickers are all about prices. Investing is about a lot more than prices. Wean yourself. Shun the ticker. Abstain from looking at share prices every day.Turn off the noise. Look at the operating results of the business you have bought. If the company is good, the stock market will ultimately validate it.
11. View market downturns as buying opportunities: When there is a market downturn, do not run away from it. This is an opportunity to buy great businesses at a cheap price. When the market crashes, search for quality businesses that go on sale for reasons other than the fundamentals of the business or the quality of management. You have to recognise the difference between a temporary setback and a real fatal flaw. But when a strong business with a competitive advantage, strong management and low stock price comes on to your investment screen, pounce on it.
12. Don’t swing at every pitch: It is impossible to make predictions about a lot of businesses. So, when you find a good company at a good price, then you should buy a reasonable amount of it. You have to be patient, but invest aggressively when the time is right- good business, good management and good price.
13. Ignore the macro, focus on the micro: The large trends that are external to the business do not matter. It is the little things that are business specific that counts. Don’t bother about macroeconomics. Be a business analyst. Macro events that push down stock prices can create very good opportunities. Don’t panic when that happens and seek to buy great businesses at that time.
14. Take a close look at management: See if the management is working for the shareholders, frugal, dedicated to improving shareholder capital and the rational allocation of capital, repurchases shares, treats shareholders as partners, has a candid and straightforward annual report and engages in honest accounting. The quality of management is important, but so is the quality of the business and the track record of performance. The substance of performance is more important than the appearance of performance.
15. Don’t listen to Wall Street: Wall Street is obsessed with short-term performance. That is of no use to you. Ignore all charts. If somebody says they have a foolproof method to get rich in the stock market, run, don’t walk for the nearest exit. The key to successful investing is patience and discipline. Invest like Benjamin Graham and search for discrepancies between price and value or buy index funds.
16. Practise independent thinking: When investing, you need to think independently. You are neither right or wrong because people agree with you. You are right because your facts and reasoning are right. Don’t follow herds. Neither follow a contrarian strategy blindly. Think independently – there is no substitute.
17. Stay within your circle of competence: Know the industries and businesses which you know you can analyse and you are comfortable with. Stay within the circle of competence. Do not go outside it to make more money. Play your own game, not others.
18. Ignore stock market forecasts: Short term forecasts are useless. Eliminate forecasts from your investment decision-making analysis. Take the time you would spend listening to forecasts and instead use it to analyse a business’s track record. Concentrate on building a portfolio of solid businesses that are likely to succeed over the long-term irrespective of what happens to the market in the short-term.
19. Understand Mr. Market and the margin of safety: Mr. Market can be a maniac or depressed. Take advantage of him. When he is depressed, you are likely to have a margin of safety. Buy great businesses then. Remember that market volatility creates opportunities.
20. Be fearful when others are greedy and be greedy when others are fearful: When people are fearful, they sell and the market price goes down. This is a good time to buy if the stock is right. You have to have courage when you invest like this and you have to act quickly.
21. Read a lot: Read Buffett, Fisher, Charlie Munger and Graham. Read the annual letters of the master. Don’t waste your time on things like forecasts, prognostications and market forecasts.
22. Develop right habits: Try to adopt the qualities of the person you admire the most. Develop positive habits. Have the right role models, and strive for rational behaviour, good habits and proper temperament. Write down the habits, philosophies and practices you want to make your own- then track them and eventually own them. Remember financial success is a matter of having the right habits.Some of the habits worth developing as an investor are:
23. Avoid the costly mistakes of others: Study the mistakes of others and do not go there. If an investment seems too good to be true, it probably is a scam. Get actively involved in your own decision making and never abdicate control of your portfolio. Always watch costs of investing and try to minimize them as much as you can.
24. Become a sound investor: This means adopting the above guideposts. It means buying stocks as businesses and looking at the fundamentals. It means constantly improving yourself. It means avoiding difficult business problems and solving easy business problems.
This post has 24 guideposts on investing culled from the investing principles of Warren Buffett. These are extracted from the book, How Buffett does it by James Pardoe.
1. Simplicity rather than complexity: When investing, keep it simple. Do what is easy and obvious. Don’t try to develop complicated answers to complicated questions. The degree of difficulty does not count in investing. Look for long-lasting companies with predictable business models. If you do not understand a business do not buy it. Buy at a reasonable price in terms of its future earning potential. Then hold on to the stock for ever. You do not have to do extraordinary things to get extraordinary results: keep it simple, make your own investment decisions and read Graham, Buffett and Munger.
2. Make your own investment decisions: As investors we have two choices, we can buy asset classes passively( stocks, bonds, cash, gold, real estate, etc) and hold them for the long-term or we can find the true value of an asset and buy it at a price that is lower than the true value. Most of us are suited for the passive approach. If we want to go for the value-finding approach, we need to become a value investor. This means understanding businesses and understanding market prices. You have to know how to value a business and buy a decent amount of that business when it is undervalued and hold for the long-term. You should not listen to brokers, financial analysts or pundits on television who usually have vested interests.
3. Have the proper temperament: For the passive investor, this means buying regularly over many decades and never selling at a market bottom. For the active investor, it means to hold great businesses for long periods of time. It means not to panic if the stock you hold falls by 50%. It means to never make an investment decision because others tell you to do so. It means to be greedy when others are fearful and be fearful when others are greedy.
4. Be patient: Think 10 years rather than 10 minutes. If you are not ready to hold a stock for a decade, then do not buy it. If you follow this discipline of patience, you will amass wealth. Successful investing means buy and hold. You have to find a few great companies and sit on your ass. It is a mistake in investing to be too fretful. Patience is part of the game. When you buy you buy as if the market is going to be closed for the next five years and you are going to hold the investment for the rest of your life. Buy good businesses, keep an eye on their business performance and not on the price. If you buy the right things, you can hold forever.
5. Buy businesses, not stocks: When you buy and hold you have to buy the right business. If you cannot find which is the right business to buy, then you should buy the whole market. When you buy a stock, you buy a part of an actual business. Even when you buy an index fund you are buying the business of a country or region or even the whole world. It is not a piece of paper. Business performance is the key to picking stocks and you should study the long-term track record of the business you want to buy. If you want to buy a business, then you should look for businesses you can understand. They should be doing the same thing they were doing a decade back and should be doing the same thing in the future. Look for certainty, not glamour. You can only understand such businesses. The businesses should have favourable long-term prospects, be run by honest and competent people and be available at a reasonable price. You should think about the business long-term rather than the stock short-term.
6. Look for companies that are franchises: Warren Buffett likes to buy companies with durable competitive advantage. This is what we mean by a franchise- they have a deep moats. They sell products that are needed or desired, not overly capital-intensive, seen by its customers as having no close substitute and not subject to price regulation. Search out such fortress like firms that stand out from their competitors. Buy them when they become reasonably priced and do not sell them at all.
7. Buy low tech companies not high-tech ones: High tech companies may have rapid growth but long-term sustainable growth in these companies cannot be predicted. Look for companies that do not change apart from doing more business. Avoid businesses in changing industries. Invest in “old economy” businesses. Remember that it takes decades for a company to become great. The companies that become great are those that are involved in making products that do not go obsolete with time.
8. Concentrate your stock investments: When you are convinced of a strong business’s prospects, be aggressive and add to your position rather than buying your fifteenth or twentieth stock on your list of possible investments. When putting together your stock portfolio, aim to own no more than 10 stocks. Make sure they fit Buffett’s criteria. Be courageous. Portfolio concentration can help you to focus your mind wonderfully as you are less likely to act on impulse or emotion.
9. Practice inactivity, not hyperactivity: Doing nothing is often a sign of investing brilliance. Do not trade for trading’s sake. Frequent trading is a hallmark of overactive investors, who tend to wind up with more losses than gains. Be a decades trader, not a swing or day trader. Don’t mistake activity for achievement. Beware of hidden costs. Don’t trade often. When in doubt, be quiet.
10. Don’t look at the ticker: Tickers are all about prices. Investing is about a lot more than prices. Wean yourself. Shun the ticker. Abstain from looking at share prices every day.Turn off the noise. Look at the operating results of the business you have bought. If the company is good, the stock market will ultimately validate it.
11. View market downturns as buying opportunities: When there is a market downturn, do not run away from it. This is an opportunity to buy great businesses at a cheap price. When the market crashes, search for quality businesses that go on sale for reasons other than the fundamentals of the business or the quality of management. You have to recognise the difference between a temporary setback and a real fatal flaw. But when a strong business with a competitive advantage, strong management and low stock price comes on to your investment screen, pounce on it.
12. Don’t swing at every pitch: It is impossible to make predictions about a lot of businesses. So, when you find a good company at a good price, then you should buy a reasonable amount of it. You have to be patient, but invest aggressively when the time is right- good business, good management and good price.
13. Ignore the macro, focus on the micro: The large trends that are external to the business do not matter. It is the little things that are business specific that counts. Don’t bother about macroeconomics. Be a business analyst. Macro events that push down stock prices can create very good opportunities. Don’t panic when that happens and seek to buy great businesses at that time.
14. Take a close look at management: See if the management is working for the shareholders, frugal, dedicated to improving shareholder capital and the rational allocation of capital, repurchases shares, treats shareholders as partners, has a candid and straightforward annual report and engages in honest accounting. The quality of management is important, but so is the quality of the business and the track record of performance. The substance of performance is more important than the appearance of performance.
15. Don’t listen to Wall Street: Wall Street is obsessed with short-term performance. That is of no use to you. Ignore all charts. If somebody says they have a foolproof method to get rich in the stock market, run, don’t walk for the nearest exit. The key to successful investing is patience and discipline. Invest like Benjamin Graham and search for discrepancies between price and value or buy index funds.
16. Practise independent thinking: When investing, you need to think independently. You are neither right or wrong because people agree with you. You are right because your facts and reasoning are right. Don’t follow herds. Neither follow a contrarian strategy blindly. Think independently – there is no substitute.
17. Stay within your circle of competence: Know the industries and businesses which you know you can analyse and you are comfortable with. Stay within the circle of competence. Do not go outside it to make more money. Play your own game, not others.
18. Ignore stock market forecasts: Short term forecasts are useless. Eliminate forecasts from your investment decision-making analysis. Take the time you would spend listening to forecasts and instead use it to analyse a business’s track record. Concentrate on building a portfolio of solid businesses that are likely to succeed over the long-term irrespective of what happens to the market in the short-term.
19. Understand Mr. Market and the margin of safety: Mr. Market can be a maniac or depressed. Take advantage of him. When he is depressed, you are likely to have a margin of safety. Buy great businesses then. Remember that market volatility creates opportunities.
20. Be fearful when others are greedy and be greedy when others are fearful: When people are fearful, they sell and the market price goes down. This is a good time to buy if the stock is right. You have to have courage when you invest like this and you have to act quickly.
21. Read a lot: Read Buffett, Fisher, Charlie Munger and Graham. Read the annual letters of the master. Don’t waste your time on things like forecasts, prognostications and market forecasts.
22. Develop right habits: Try to adopt the qualities of the person you admire the most. Develop positive habits. Have the right role models, and strive for rational behaviour, good habits and proper temperament. Write down the habits, philosophies and practices you want to make your own- then track them and eventually own them. Remember financial success is a matter of having the right habits.Some of the habits worth developing as an investor are:
- Do sufficient homework and due diligence on companies before you buy them.
- Check your stocks only periodically and avoid the daily noise and the talking heads.
- Ignore stock tips regardless of the source.
- Avoid the herd and make your own investment decisions based on independent thinking.
- Exhibit patience by waiting patiently for companies to grow in intrinsic value.
- Avoid investing in companies, businesses or industries you don’t understand.
- Buy when people are fearful and sell when people are greedy.
- Confine your investments to a few select holdings.
- Live by the rules of Mr. Market and the margin of safety
- Read key financial newspapers and magazines consistently.
23. Avoid the costly mistakes of others: Study the mistakes of others and do not go there. If an investment seems too good to be true, it probably is a scam. Get actively involved in your own decision making and never abdicate control of your portfolio. Always watch costs of investing and try to minimize them as much as you can.
24. Become a sound investor: This means adopting the above guideposts. It means buying stocks as businesses and looking at the fundamentals. It means constantly improving yourself. It means avoiding difficult business problems and solving easy business problems.
Source: http://thetaoofwealth.wordpress.com/
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