8 investing tips from Warren Buffett you can follow in 2022
Who hasn’t heard of American business mogul, investor and philanthropist Warren Buffet? He is a leading investor and has a net worth of US $ 107 billion as of December 24, 2021. He is currently Chairman and CEO of Berkshire Hathaway and is known as the âOracle of Omahaâ. His investing mantra is widely known as he started investing at the age of 11. For the past 80 years, he has shared his investment advice with the world through his letters and public speeches at the Berkshire Hathaway AGM speeches.
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Buffett manages Berkshire Hathaway, which has around 60 companies under its umbrella, including Dairy Queen, Coca-Cola, Heinz, Apple, Bank Amer Corp, American Express, Moody’s Corp, Verizon Communications and US Bancorp Del to name a few. If you want to invest, you can check out Oracle of Omaha’s investment strategy which is simple and easy to understand. The seasoned investor places his money in large companies that are trading below their intrinsic value due to stock market losses, and then holds those investments for the longer term.
While Buffet’s investment strategy includes many values ââand principles. Here are the top 10 tips you can incorporate into your own investing strategies.
- Invest in big companies
Buffet does not invest in struggling and complicated businesses and industries, although they are available at low prices. It settles for high-quality, fair-priced businesses rather than fair-trade businesses at a lower price, with promising long-term opportunities for continued growth.
His investment philosophy evolved over the years with experience, as Berkshire Hathaway was one of his worst investments. He bought the stocks at a low price because he believed that if you buy the stocks at a lower price, there will be news that may increase his price despite the uneven performance in the long run.
But he shared that with this he changed his philosophy and concluded that unless you are a liquidator, buying cheaper, non-quality stocks is a stupid step. To know the quality of the company, you can analyze the ratio of return on invested capital. If the ratio is higher, it indicates that the business has the potential to compound its revenue faster, which increases its intrinsic value over time.
- Safety margin
A margin of safety refers to the attribute of an investment that helps investors realize losses. For example, if the market price of the stock is $ 20 and the company’s assets are realistically worth $ 25 per share, then there is a safety margin of $ 5, so the intrinsic value of assets will prevent stock prices from falling too sharply. But always buy stocks that are priced below their intrinsic value, as this will not negate the effect of a subsequent decade of favorable business developments.
- Retain long-term investments
One of Warren Buffet’s most important investment strategies is to buy stocks that have a market value below their intrinsic value and hold them for a longer term. He has held some of his investments for decades, as quality companies typically earn higher returns and increase in value over time. Fundamentally strong companies take years to develop, which positively affects their stock prices.
- Diversification can be dangerous
Buffet does not invest in too many stocks from different sectors as it can be difficult for him to manage and monitor companies. Some investors over-diversify their portfolios, which also means that they have invested in mediocre companies that reduce the return on their high-quality investments.
Read also : Does investment maestro Warren Buffet trade penny stocks?
- Most news is not news
Most news is just about making noise and triggering emotions in investors to do something. Imagine there are so many companies that have been working for many decades and faced all the unexpected challenges, but they are still stronger than before. These types of news affect short-term stock prices and have no impact on the long-term profits of the company.
- Don’t fear market crashes and corrections
You can only make a profit when you buy a stock at lower prices and sell at higher prices, but some investors do the exact opposite because they fear a stock market crash and sell their holdings before the prices fall further. Buffet suggests that stock market crashes are an opportunity to buy preferred or leading stocks at a lower rate.
- Know the difference between price and value
Stock prices change in seconds, but underlying trading fundamentals do not. This means that there may be a period of time in the market where stock prices have no relation to the fundamentals of the company.
Stock prices usually fall in such situations, such as a financial crisis, regardless of the quality and potential of the company, but companies with potential emerge from the crisis. In such a situation, the stock price temporarily separates from the fundamentals of the company.
- Stay away from trending stocks
Trending stocks are stocks that gain attention due to sudden activity or news, high price volatility, or high trading volume. Investors should avoid such actions. You should never buy a stock if the prices suddenly go up. The best time to buy a stock is when no one is interested.