Warren Buffet, also known as the Oracle of Omaha, is no stranger to investing. There’s a lot to learn about how to invest in shares from the most successful man in the world of investing.
Here are six lessons from Warren Buffett that you can use to invest better.
#1: “If you buy things you don’t need, you will soon sell things you need.”
You can make more money not only by investing or taking up a second job but also by resisting the temptation to splurge. As the saying goes – a penny saved is a penny earned.
Key Takeaway: Due diligence is needed to be a successful investor. Spending wisely is not to be confused with being miserly, it’s about being smart.
#2: “Price is what you pay. Value is what you get.”
Most of us know this: the money we pay for something and the value we get out of it, most of the time, does not have a correlation. You could possibly buy a posh apartment for Rs. 1 crore. But staying in the apartment does not guarantee a high quality of life, does it?
The price of a stock is mostly governed by market sentiments and not necessarily by the profitability or value of the company itself. Warren Buffet suggests that the best stocks to buy are those whose price is lesser than its actual worth. He says, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Key takeaway: Instead of trying to time the market invest in assets that will generate inflation-beating long term returns and then hold on it for a long time.
#3: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Warren Buffet recommends investing in stocks which are undervalued but have great potential, and holding on to them forever. In-line with this philosophy, buying shares of a wonderful company at a fair price is much better than buying a mediocre company at a cheap/bargain price.
Buffet notes that over the long term, mediocre companies gives much lesser returns compared to wonderful companies, so much so, that the bargain price for which you bought the mediocre company stock does not seem like a bargain anymore.
Key takeaway: Don’t try and time the market or buy into NFO mutual funds because the NAV is low. Invest whenever you have the money and hold it for as long as possible. Invest whenever you have the money and hold it for as long as possible.
#4: Be loss-averse
Most investor’s measure performance solely based on returns. Instead, a good policy is to be loss-averse. Preserving your capital should be your top goal. By avoiding losses you’ll naturally be inclined towards investments with assured returns.
As Warren Buffet puts it, “Rule #1, never lose money. Rule #2, never forget Rule #1.”
Key takeaway: Buffet talks about the safety of capital, and not becoming greedy and going after too-good-to-be-true stocks. Instead, focus on stocks that are undervalued and are of companies that you understand and have long-term potential.
Many investors misunderstand this abd invest in Bank FDs whose returns after tax does not beat inflation.
#5: Be tax savvy
Like all billionaires, Buffett too is tax savvy.
Be knowledgeable about tax laws and use them to your advantage.
For e.g. while investing in Bank FDs might give you 9% returns, the interest is actually taxable as per your tax bracket. The real return, if you are in the 30% tax bracket, will fall to just a little above 6%. Now, that’s below the inflation rate and you are effectively losing money the longer you invest in it.
Key takeaway: Understand the tax implications of your investment fully before making a decision
#6: Limit what you borrow
More is not always good: case in point, loans and credit card debt.
Considering the fact that the phone you bought for EMI (plus the processing fee which is indirectly the interest you pay for the EMI facility), and its loss of its value over time (most cases, the moment you buy it), it is best if you limit your borrowing.
Key takeaway: Borrow only when it’s absolutely necessary.
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