1. Not Holding cash
Contrary to advice provided by asset management tacticians on Wall Street, Warren Buffet believes that holding cash for the sake of it is not a good investment strategy. While the experts suggest that one should put 60% of their cash into stocks and hold the remaining as cash, Buffet strongly disagrees with such an idea. Rather, he suggests that we should invest all of our money in decent company stock to make the most out of them. Buffet immediately converts his liquid asset to non-liquid assets even in situations where he can’t find good stocks or has more cash balance than normal due to unexpected receipts or asset sales. Building up cash makes him unhappy, so he finds alternate ways of using it instead of keeping it idle.
2. Ignore Market Sentiment
Generally, Warren Buffet tends not to hold any opinions about the contemporary performance of the stock market. He doesn’t care whether the market is in bull or bear. This is because he believes that it clouds his judgments and invites indecision, even for matters that he is quite bullish about. For instance, if he perceives that a business can provide good growth and returns, but the market is in a downturn, the state of affairs may distort his rationale about the business. And, he would rather invest in something that he is confident about rather than be cautious about something that is beyond his control i.e. the market. Buffet tries not to be influenced by the ways of the market, he invests in both upward and downward momentum.
3. Do Not Diversify
Buffet likes to put his money into fundamentals. He believes an individual who knows what he is doing should not be worried about diversification. He terms diversification as a “protection against ignorance.” It allows an investor to safeguard themselves from market fluctuations by not putting all of their eggs in one basket. Rather he believes in putting all eggs in one basket and watching it closely. According to him, diversification is a beneficial approach for anyone who is not confident about their ability to analyze the business. But one with a sound ability to value businesses need not hold a large variety of stocks as there are only a handful of extraordinary companies, so it is better to invest more in them. His best-return stocks were Coca-Cola and American Express.
4. Create Your Convention On Risk
Warren Buffet believes that market volatility is not a suitable tool to measure risk. According to Buffet, the beta coefficient (β), a mathematical measure of past volatility, has no bearing on the present investment risk. Instead, the risk is determined by the nature and operation of the business. For example, perishable goods such as fruits and vegetables have an inherent risk of getting spoiled if not properly stored or kept in inventory for a long. So, if one can understand the economics of the business and its management to determine a sensible price for the investment, there is minimal risk. Always have a sound plan and understand what you are investing in regarding your money.
5. High IQ Doesn’t Matter In Investing.
One does not need a high intellectual quality to become an investor; it is all about logical thinking and communication. Warren Buffet believes that he doesn’t have an IQ of a genius, yet his investments have deemed him one of the richest persons on the planet. Preferably, one requires a stable personality that doesn’t derive contentment from being with or against the crowd. Stock investment is not about taking polls or having people supporting or going against our conception. It is about managing our emotions and correcting our facts and reasoning to yield returns.
6. Invest In Yourself.
Buffet advocates that the best investment is one that an individual makes for himself. For illustration, communicating well in writing and person can help one to share their thoughts and ideas better. As a result, they can increase their value and influence people. Buffet himself improved his communication skills by taking a course at Dale Carnegie. When we invest in ourselves, the outcome will only benefit us and stay with us for life. We only have one mind and body, so if we can invest ourselves in skills that can serve us in the future, they will make our lives easier in the latter stages of life when learning can be tougher.
7. No Norm For Asset allocation
The popular portfolio ratio of 60-40 or 65-35 allows a person to reduce risk greatly but at the sacrifice of huge returns. The best way to manage assets is to keep our default position intact i.e., hold short-term instruments and take up any smart opportunity that comes along the way. Buffet maintains that we need not be bound by the requirements set out by asset management advisers. People crave to know the future, so there has been a market for people who claim to predict the future based on their expertise. This refers to the stock market experts on Wall Street who make claims to generate maximum returns for their clients but are ultimately motivated by economic incentives and fail to deliver expected value. So we should rely on our skills while investing rather than follow stringent rules or assertions others make.
8. Avoid Day trading.
Warren Buffet says day trading is like gambling. Instead, he urges people to follow value investing and invest in strong companies for long periods to obtain good returns. Humans have a huge propensity to gamble, and gambling turns even a boring football game exciting by providing an opportunity to earn more. But the odds of winning are against gambling people, so he calls such people ignorant. Also, he finds it socially revolting that the government preys on these poor choices of its citizens by levying large amounts of taxes on gambling.
9. Growth And Value Are One.
Buffet’s position is that there are no growth stocks or value stocks. Also, he sees growth and value as indistinguishable factors, so he argues that there are not enough differences between them to justify putting them in contrasting asset classes. Rather, he advises that before investing in any business, we have to understand the economics of it, the amount put into and the return generated by the business. The airline industry can be used to debunk growth stocks. It has been considered a growth business, but its growth turned out to be a curse because airline companies require heavy capital investment but can only generate minimal returns. Conversely, growth is good for a company because it only needs a little additional investment to provide higher returns.
10. Don’t wait for the market correction.
Buffet believes in the idea that it is tiresome to find good companies and secure investments that can remain great for over 20-30 years. So, we should carefully buy such stocks, or when we find them, unless the price quoted is incomprehensible high, we should hold it for a long period. It is not a good idea to wait for a market recession to invest in a strong company or to panic sell when there is a little rise in its price. Good stocks can reach great heights and can bring financial freedom. People need to develop patience and invest today to reap the benefits in the coming days. Also, the downtrends do not come along in regular intervals; rather, they are sudden, like the 2020 market scenario.