Warren
Buffet is no stranger to the world of
investing. There’s a lot to learn 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 go out and just splurge. As the saying goes – a
penny saved is a penny earned.
Key
Takeaway: To be a successful investor, you need to use due
diligence. Spending wisely is not about being miserly, but about being smart.
Invest in assets that give you good returns over the long term- one that helps
you secure your financial future.
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 1 crore rupees. But staying in the apartment does not guarantee a
high quality of life- does it?
When
it comes to investing, especially the stock markets, 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 to buy stocks when the
price you have to pay for the stock is less than the intrinsic value of
it. 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
and extract every rupee profit you can possibly get out of your investment,
invest in assets that will generate inflation-beating long term returns and
hold on it for a long time (In buffet terms, forever).
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 undervalued stock with great potential and
holding on to them forever. In-line with this philosophy (which undoubtedly
worked so well, and still continues to work), 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.
4:
Be loss-averse
Majority
of investor’s measure performance solely based on return. Buffett advices that
you should not strive to make every dollar a potential profit which involves
too much risk. Instead you should 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.”
The
takeaway: While Buffet talks about safety of
capital, he’s referring to stock investing where you don’t become greedy and go
after too-good-to-be-true stocks. Instead, you focus on stocks that are
undervalued and are of companies that you understand and has long-term
potential.
Many
investors misunderstand this as a recommendation for investing only in Bank FDs
or equivalent assets which are mostly considered safe. Investing in Bank FDs is
almost always guaranteed to be a losing proposition over the long term since
after-tax, the returns you get annualized are below inflation rate.
5:
Be tax savvy
Like
all billionaires, Buffett too is tax savvy.
Be
knowledgeable about tax laws and use them to your advantage. Before you invest,
make sure you understand the tax implications of your investment.
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 inflation
rate and you are effectively losing money the longer you invest in it.
The
takeaway: Understand the tax implications of
your investment fully before making a choice.
6:
Limit what you borrow
More
is not always good- case in point, loans and credit card debt.
With
daily offers from ecommerce companies, it might be tempting to buy that latest
mobile phone on an EM. Considering the fact that the phone you bought for EMI
(plus the processing fee which is in-directly the interest you pay for the EMI
facility), and it loses its value over time (most cases, the moment you buy
it), it is best if you limit your borrowing.
The
takeaway: Borrow only when it’s absolutely
necessary. When borrowing, make sure you understand all the fees associated
with it. Sometimes, the real cost of bowing money will be hidden as
miscellaneous charges like processing fee.
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