Singaporeans are known for our “kiasu-ness”, and most parents will agree that to give our children the best education, we should send them to the top schools to learn from the most outstanding teachers.
Similarly, if you are a new investor who is trying to get to be better at investing, why not turn to arguably the best teacher, the legendary value investor Warren Buffett?
Let’s examine some of the key things about investing that Warren has taught us which will be useful for budding investors, especially those who subscribe to his belief in value investing.
1. On risk involved in investing
Imagine if you were made to run a full marathon now, right this instant. Will you be confident that you can complete it unscathed?
Considering how physically and mentally demanding it can be, surely not many people will agree to do it straight away, it’d be too risky. The likelihood of our body collapsing from exhaustion is higher due to the lack of training.
Now, what if you have three years to prepare for this marathon?
Surely most people will feel much more confident that they’ll be able to condition and train their bodies to handle the demands of such a strenuous exercise.
The point is this: the demand is still the same – to run a marathon, however, you are much more likely to succeed in the second instance since you are better prepared this time round.
Compare this to investing in the stock market. You are asking for trouble if you are rashly entering the market trying to make a quick buck. We can quickly lose our investments in a short period that way.
However, just like how one can train and prepare to complete the full marathon eventually, an individual can slowly develop himself to become a sophisticated investor by dedicating time to study and learn more about the market.
The action is still the same – investing. But to those who commit themselves to understanding the businesses they are investing in, rather than wildly speculating, the risk that they bear is significantly lowered.
2. On selecting businesses
A moat is a “deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defence against attack.”
About business, Warren Buffett likes companies with strong competitive advantages that will form a solid defence against competitors.
For example, companies with a strong brand name like Nike and Adidas are likely to continue to be popular amongst its loyal customers and hence, can consistently generate sustainable profits.
Even with many other competitors selling similar products to them, many will still return to these brands because of their brand name.
Another example can be KFC with its secret recipe for its finger-licking good fried chicken.
The delicious recipe makes it hard for competitors to replace its position in the market as people will always go back for more of its tasty fried chicken despite more fast food options becoming available.
These are the companies that Warren Buffett will want to invest in since it is likely to continue to be profitable in the long run.
3. On buying companies at a discount
To make a profit out of our investments, the simplest concept to grasp is that the price that we buy the stocks at should be lower than its intrinsic price that we have determined.
For example, if you think that a particular stock is worth $50, you will only make a profit if you bought the stock at any price below $50.
With that in mind, it will not be surprising that Warren Buffett is a great advocate of buying stocks when the prices go down. Instead of trying to sell his shares during a market correction, he believes that’s when the market is offering you the best opportunity to buy.
“The best thing that happens to us is when a great company gets into temporary trouble … We want to buy them when they’re on the operating table.”
So, keep your eyes open and look out for wonderful and sustainable businesses that are momentarily selling at a discounted price!
4. On the value of a good night’s rest
Many investors are eager to jump straight into the market to make a quick buck and become an overnight millionaire.
However, the chances of that happening are so slim. Many people end up becoming disillusioned and worse still, many took their lives when they couldn’t handle the devastation of a market crash.
Warren Buffett knows the importance, and pricelessness, of having a peace of mind. We should recognise this before we step foot into the investment arena.
Speculating and trading can bring about an enormous amount of stress as one observe the crazy and unexplainable fluctuations of prices that can change in a matter of seconds.
I’ll leave you with this quote from the great oracle of Omaha, and hopefully, this post has helped you to gain some insights into that brilliant mind of his, and make your road to financial independence just a little smoother.
I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. – Warren Buffett