The rule that Warren Buffett lives by

Berkshire Hathaway CEO Warren Buffett arguably the greatest stock investor in the world. He is also a bit of a philosopher.

Buffett breaks down his investment ideas into simple, memorable sounding pieces. Do you know what his country sayings really mean? Does your philosophy stand in any economic environment? Find out below.

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  • Berkshire Hathaway CEO Warren Buffett is consistently ranked as one of the richest people in the world.
  • He is considered by some to be the best stock picker in the world; His investment philosophy and guidelines influenced many investors.
  • One of his most famous quotes is “Rule #1: Never lose money. Rule #2: Never forget rule #1.”
  • Another is, “If the business is good, the stock will eventually follow.”
  • The third is, “It’s much better to buy a great company at a fair price than to buy a decent company at a great price.”

Alison Czinkota / Investopedia

‘Rule #1: Never lose money. Rule #2: Never Forget Rule #1’

Buffett personally lost about $23 billion in financial crisis of 2008and his company, Berkshire Hathawayhas lost its respectable AAA rating. So how can he tell us to never lose money?

He is referring to the mindset of a rational investor. Don’t be frivolous. Don’t gamble. Don’t enter an investment with the cavalier attitude that it’s okay to lose. Be informed. Do your homework. Buffett only invests in companies that he research and understand. He’s not in an investment willing to lose, and neither are you.

Buffett believes that the most important quality for an investor is temperament, not intellect. A successful investor doesn’t focus on following or going against the crowd.

The stock market will experience fluctuations. But in good times as well as bad, Buffett remains focused on his goals and so should all investors.

Warren Buffett rarely changes his long-term investment strategy, regardless of the market.

‘If the business does well, the stock will eventually follow’

Book Smart Investor via Benjamin Graham—British-American economist, professor, and investor, who is also considered the father of investment value—convinced Buffett that investing in stocks was tantamount to owning a piece of the business. So when looking for a stock to invest in, Buffett looking for businesses shows a favorable long-term outlook. Does the company have a consistent operating history? Does it have a dominant franchise? As a business that generates high and sustainable profits profit margin? If the company’s stock price is trading below expectations for future growth, it’s a stock Buffett might want to own.

Buffett never buys anything unless he can write down why he would pay a particular price per share of a particular company. It is recommended that all investors do the same.

‘Buying a great company at a fair price is much better than buying a fair company at a great price.’

Buffett is a value investor who likes to buy quality stocks at the lowest prices. His real goal is to build more operating power for Berkshire Hathaway by owning stocks that will generate solid returns and price increase for many years to come. As markets reeled during the 2007-2009 financial crisis, Buffett stocked up on large long-term investments by spending billions of dollars on the likes of General Electric and Goldman Sachs.

To pick good stocks, investors must set criteria to spot good businesses and stick to their discipline. For example, you can search for companies that provide durable products or services and also operating income and seeds for future profits. You can set the minimum Market capitalization you are willing to accept, and maximum price-to-earnings (P/E) ratio or debt level. Finding the right company at the right price—with a margin of safety against unknown market risk—is the ultimate goal.

Remember, the price you pay for a stock is not the same as the value you receive. Successful investors know the difference.

106.8 billion USD

Berkshire Hathaway CEO Warren Buffett’s net worth, as of December 9, 2022, makes him the fifth richest person in the world.

‘Our favorite holding period is forever.’

How long should you hold a stock? Buffett says that if you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes. Even during what he calls the “Economic Pearl Harbor,” Buffett has faithfully held the bulk of his portfolio.

Unless a company has undergone a major change in outlook, such as labor or product problems, it cannot be obsolete, long holding period will prevent investors from acting too human. Too much fear or too much greed can cause investors to sell stocks at lows or buy at highs and destroy portfolio appreciation in the long run.

What is the essence of Buffett’s Investment Principles?

The short answer is to buy undervalued stocks with solid long-term potential. The longer answer is that it requires research and a steady commitment to the companies you’re investing in, which means holding them through all the ups and downs (market volatility), unless something goes wrong. significant change in the company’s outlook, such as product obsolescence.

What metrics does Buffett look at when analyzing a particular stock?

In addition to analyzing the long-term business prospects of a particular company (e.g. competent senior management, product livelihoods and Accounting balance sheet), Buffett is known for focusing on market capitalization (not too small), debt levels (not too large), and earnings per share (not too high). Remember, he’s looking for solid companies with sound balance sheets and positive long-term prospects—things he can hold onto for the long haul.

What is the ideal holding period for a particular investment?

Buffett can frankly answer “forever” to that question, which is not far from the truth. Even in extreme market volatility, Buffett will maintain his portfolio and may even add more to it if certain stocks drop to attractive prices. Buffett is a long-term value investor who sees volatility as an opportunity to buy at attractive levels, or to take benefit and sell some of his shares if market volatility exceeds what he believes is a fair price.

Key point

It’s safe to say Warren Buffett is an extraordinary investor. He accomplished this by following some very basic rules for buying and holding the investments in his portfolio. Buffett is a value investor who is always looking to buy solid companies with a positive future outlook for less than fair value. Indeed, Buffett’s portfolio should be viewed as a investment portfolio rather than a collection of stocks that he actively buys and sells.

His stock picking method involved a lot of research to establish a fair price for a particular stock. His thinking may be to buy an individual stock, but only for the price valuation he considers favorable. So while the rest of the market may be in sell-off mode, for example, Buffett sees an opportunity when prices fall to his pre-determined fair valuation. It can be said that he likes Stock XYZ, but dislikes its current market price. If the market cooperates and the price of that stock falls into his preferred value range, he is willing to buy it. In that sense, to paraphrase Buffett, the market always exists to match your investment strategy, but only if the price is right.


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