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I won’t believe you if you say you haven’t heard of Warren Buffett! He is the greatest investor of all time and is currently the 6th richest man on earth.
Most of the money he’s made is out of his investment and there are a few tips and principles he sticks to while investing.
Today we’ll be focusing on the best tips Warren Buffett has to tell us about investing so that just like him, we too can make enormous profits out of the stock market.
By keeping these tips in mind, investors can minimize their risk while maximizing their profits, and I’m sure we all want that, right?
So without further ado, let’s learn how to make money investing like Warren Buffett.
Warren Buffett’s Investing Tips
1. Maintain A Cash Reserve
Wait, what? The king of investing in financial markets believes in having cash. Yes, Warren Buffett invests a lot of money but he also keeps a lot of cash at hand.
The reason is that he knows that financial markets like stocks, bonds, debentures, forex, debt, and commodities have their risk, and the way everyone makes money through the markets, similarly you can also lose money.
But keeping cash is not only great as there can be losses to face.
Warren Buffett prefers cash because when there’s an opportunity to invest in a highly profitable venture or other investment opportunities, he is ready to invest and doesn’t have to sell his stocks for instant cash. For this reason, having cash at hand is always the best option.
Not only that, In his 2011 letter to his shareholders, Buffett reprinted a note from 1939 from his grandfather which said: “I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash….I hope it never happens to you.”
Don’t take this advice lightly, this is personal finance 101. Always invest money but keep cash close to you.
An ideal strategy is to save 20%, spend 30%, and invest 50% of your net income (income after tax). If possible, try spending less, saving more which in turn increases your investments.
Let’s say a Recession hits everyone, stock markets crash, and share prices of most companies fall extremely low. This happens to even large corporations.
At this time if you have idle cash at hand or a bank, you can easily invest money in these stocks and make huge profits (sometimes 100% or 200%). But let’s say all your money was tied up in investment. You would have faced grave losses during the recession.
Remember Cash Is King!
2. Invest in What You Understand
One of the easiest ways many new investors make losses is by investing in those companies they don’t know or don’t understand at all.
For example – ITC is a common share owned by investors. New investors don’t know anything and invest in ITC assuming. If I ask you what ITC deals in, you’re probably going to say noodles or wheat flour, but did you know, that the major profits of ITC (almost 70%) come from the Tobacco sector?
Let’s say India decides to ban Tobacco and other such products tomorrow, the first company to face heavy losses will be ITC. I’m not against ITC, it’s a great stock but lack of knowledge can lead to heavy losses.
If you know the IT sector, invest in companies like Infosys and TATA. Similarly invest in those stocks that you learn about and of which you understand the revenue model. Blind investing is extremely risky and must be avoided at all times.
3. Be Cautious Amid Market Greed
This is probably Warren Buffett’s favorite statement, “Be fearful when others are greedy, and greedy when others are fearful” Let’s break it down. If the stock price of ITC is Rs 195, let’s say a lot of people start buying this stock, this will increase the value of the stock but not the actual value of the company.
The stock price will rise from 195 to 200 to 207 to 231. You need to realize that by buying the ITC shares at 231, you’re paying a premium of 36 for a stock whose actual worth is 195!
These are temporary hikes in the stock market and don’t necessarily increase the stock price. Why does this happen? Because few investors start saying prices will increase and this causes fluctuations.
Don’t buy and fall into such traps. You’ll face heavy losses instead of awesome profits. When the market is greedy, that’s a sign for you to stay away, similarly, when investors don’t invest in stock due to fear, check its financials and track record, if it makes sense try pouring your money into it, you might just make those awesome profits.
4. Prioritize Dividend-Paying Stocks
Who doesn’t love dividends? I’m sure I love it. It’s a recurring source of income.
A company that gives dividends is certainly a company that has a good financial record and it means the company is making enough profits. All this means your investment portfolio is profit-making.
Warren Buffett loves a company that gives dividends and is constantly aiming to give more dividends. It’s money in the pocket!
Many investors including Buffet say that over time, the dividend payout they receive exceeds the amount they paid to purchase that stock. Now that’s a great return on investment.
Do thorough research on those stocks that provide great dividends and invest some money in them. You’ll be glad you did this!
5. Seek Undervalued Stocks
If you look at a company’s financials, a minimum of 3 years, you can predict how the company will perform in the coming years. You need to look at its return on capital employed, its expenses, the amount of debt they have, its debtors and creditors, basically, the entire balance sheet, and more.
Wow doesn’t that seem like a lot? You can always use websites like MoneyControl to learn all about a company in just one place. By keeping yourself up to date with the latest news and trends of a specific company, you will learn its value in the market.
If you feel that a stock is undervalued, you should grab the opportunity and invest in it. Often investors miss a few golden stocks as they have a low stock price.
Investors only focus on stocks where they can see a clear path. If you find a stock that you feel is undervalued, invest in it!
6. Practice Long-Term Investing
Buffet, like many great investors, is a big believer in investing for the long term. He likes to buy a stock and hold it forever. Most people get this advice wrong.
Yes, you should hold a stock for a long period but if its fundamentals have changed, if it’s facing huge debts and consistent losses, sell it right away before you face greater losses.
Buffet constantly looks at his portfolio to see if his stocks depreciate in value and if they do, he tries to figure out the wrongs in the company and if he thinks, the company is going to face losses, he sells the stock.
Do your due diligence before you buy or sell a stock. Research is extremely mandatory before you start trading in financial markets. In short, don’t do day trading, the possibility of losses in day trading is quite high.
Instead, buy a stock, have patience, and invest it for the long term. When the right price comes, sell it and make your profits.
What Are The Best Investing Tips For Beginners?
Investing is a very difficult game that isn’t suitable for everyone. You need to be smart, and quick, and have the skill to constantly learn and adapt to changing situations.
If you think you don’t have the time to invest or find investing in a stock or other financial instruments boring, you can always have a financial advisor who will guide you and invest your money for you to ensure you get great returns.
If you want to start learning about investing, I recommend you download Money Control or any other finance-based app and start reading about various companies, their financials, etc.
Read articles published by well-known websites and learn. In a year you’ll get enough knowledge to start investing and making money.
But wait does that mean you should only learn for a year and then invest in the markets? Definitely Not! The best way to learn is to practically invest in the markets.
If you’re not confident enough, don’t worry. Type “Stock Simulator” on Google, and you’ll instantly get various apps you can use to start investing. These apps will provide you with fake money and are great for beginners.
Do you follow these top 6 principles that Warren Buffett follows? Do you follow Warren Buffet’s investing tips? Share your thoughts in the comments below.
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