Four Investment Tips By Warren Buffett

Over time, Warren Buffett has given useful investment tips based on his experience. As a young investor, you would realize that one or all mistakes made falls under Warren Buffett's category.

1. Invest in stocks you understand

Investing in diverse stocks is a simple way to avoid investment mistakes. To be sure of stocks to invest in, you must take a grasp of the stock market and research on the stocks and companies you want to invest in. Often, publicly-traded companies participate in industries we have little or no experience in.

Warren Buffett says, "Never invest in a business you cannot understand."

Some companies operate businesses that are difficult to understand and investors find it difficult to forecast such companies. Not understanding the companies and being able to forecast, affect earnings of investors. In a situation where you encounter such stocks and companies that are difficult to understand, the easiest thing to do is to take a pass and move on to the next idea.

2. Plan to hold stocks for a long period of time

Warren Buffett says, “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” He further says, “Our favourite holding period is forever.” In this case, Buffett clearly expresses the 'buy and hold' mentality. Going through his past achievements, you will discover that he has held some of his positions for decades. It is known that quality businesses earn high returns and their value increase over time. This confirms Warren Buffett's statement of time being the friend of a wonderful business.

Buffett says, “The stock market is designed to transfer money from the active to the patient.”

3. Most news is noise, not news

The 80-20 rule claims that around 80% of financial outcomes can be attributed to 20% of the causes for an event. It is safe to say the percentage is higher when it comes to financial news. Most of the news headlines and conversations on TV are there to generate buzz and trigger emotions.

Buffett says, “Owners of stocks, however, too often let the capricious and often irrational behaviour of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behaviour of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.” 

Stock prices move significantly as financial matters arise. Financial news outlets also need to blow up these issues to remain in business.

Buffett says, “Remember that the stock market is a manic depressive.” 

The stock market is an unpredictable, dynamic force and it is important for investors to be very selective with the news they choose to listen to, as well as act on. 

4. Know the difference between price and value

Stock prices are often pushed at investors frequently, hence investors love to fixate on ticker quotes running across the screen. Phil Fisher says, “The stock market is filled with individuals who know the price of everything but the value of nothing.” In most cases, stock prices are inherently more volatile than underlying business fundamentals.

According to Buffett: “During the extraordinary financial panic that occurred late in 2008, I never gave a thought to selling my farm or New York real estate, even though a severe recession was clearly brewing. And, if I had owned 100% of a solid business with good long-term prospects, it would have been foolish for me to even consider dumping it. So why would I have sold my stocks that were small participations in wonderful businesses? True, any one of them might eventually disappoint, but as a group, they were certain to do well.” 

Buffett further says, “Price is what you pay. Value is what you get.” 

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