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Warren Buffett’s 12 Tips for Clever Investments

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Tips for investing successfully

9 minute read

Warren Buffet ranks not only among the wealthiest people in the world but also among the most successful investors of all times. The 88 year old (born 1930 in Omaha, Nebraska) became a billionaire through his clever investment decisions. His foresight and sense for profitable investments earned him the nickname “Oracle of Omaha” and made him a legendary investor.

In 1965, he purchased the ailing textile company Berkshire Hathaway and transformed it into a holding. By now, Berkshire Hathaway is one of the largest corporations in the world; 80 companies belong to the holding company. Its exchange rate has gone up by more than 750,000% and its share is by far the most expensive share in the world. Buffet invested almost his entire fortune in Berkshire Hathaway and is the largest shareholder of the company to this day.

In 2016, Warren Buffet was 3rd on Forbes’ list of the wealthiest people on earth, with a total fortune of 74 billion USD. Previously, he ranked 2nd on the Forbes 400 list 15 years in a row. The self-made billionaire has gathered many useful experiences on the financial market throughout his career and isn’t secretive about his recipe for success. We list Buffett’s 12 best investment tips for you here:


It is not difficult to invest well, even if amateurs often feel like it is incredibly complicated. In his book "Warren Buffett Speaks" the star investor once said: “You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.” However, a look at the lesson plans of major business schools can be a deterrent. Complex topics such as financial market or portfolio theory are on the agenda. “To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these,” Buffett continues. Instead, prospective investors only have to master two questions: “How do you correctly evaluate selected companies?” and “How do you interpret market prices correctly?”


When asked about the right kind of investment, Warren Buffett has one answer: company shares. Historically, shares have always been the most profitable option. Buffett cites the development of the American stock market as evidence. In an interview with the New York Times, the star investor once said: “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”


Warren Buffett once complained to his investors that humanity has the “perverse” tendency of making simple things complicated. This is also reflected in business schools, where complex behavior is rewarded, although simple behavior is much more efficient. Instead of relying on the most complicated investment strategy possible, investors should keep it as simple as possible. There are no bonus points for complicated investment strategies. The target should be easy to understand and the barriers to entry should be small. Buffett once said: “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” The investor doesn't have to be an expert on all companies, not even for many. It is sufficient to be able to correctly evaluate companies in your own area of competence. But Warren Buffett warns that it is absolutely vital for a successful investor to know the limits of his own area of expertise.


Warren Buffett is always looking for safe investments. The investor legend from Nebraska mostly invests in companies of which he can safely say, after careful examination, that they will develop positively. His most stable and profitable investments are the shares of the beverage company Coca Cola and the shares of the chewing gum group Wrigley. The business model plays a key role here. It should be so simple and convincing that it works even with poor management. Buffet once said: “I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will.”


The challenge for investors is to identify profitable companies with future potential. Warren Buffett suggests that this potential is not so much the scope of the business idea but rather the company's competitive advantage. “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” Even the really big investment ideas of Berkshire Hathaway can be explained in one sentence. The holding company is constantly on the lookout for “ a business with enduring competitive advantages that is run by able and owner-oriented people. When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong.”


Warren Buffett advises against short-term investments. “If you aren’t willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.” The performance of the portfolio decreases every time an investor buys or sells a stock. Instead, investors should invest their money in selected securities over the long term. Warren Buffett once wrote to Berkshire Hathaway's investors about the best duration of an investment: “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”


A famous phrase of the investment guru says: “Risk comes from not knowing what you’re doing.” Buffett is a declared opponent of diversification and modern portfolio theory. For Buffet, diversification is a protection against ignorance. Instead, he is an advocate of value investing. He once described his best investment as the purchase of the book "The Intelligent Investor" by his economics professor Benjamin Graham, the founder of value investing. That is how he learned to recognize undervalued stocks, to buy at the right moment and to hold them at least until they have reached their true value.


The Berkshire-Hathaway boss is particularly interested in company valuation. He always looks for companies that are undervalued in order to buy them inexpensively. As early as 1989, he wrote to his investors: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” He learned the important difference between price and value from his economics professor and mentor Benjamin Graham. “Price is what you pay. Value is what you get.”


Above all else, a successful investor has two qualities: discipline and patience. Or as the “Oracle of Omaha” puts it: “No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant.” The exchange market once called Buffett a “baseball game without strikeouts.” You don't have to start hitting the ball like a madman; it's enough to hit a ball right to make a home run. The problem for him as an asset manager is that the fans – his customers – are standing behind him and constantly shouting in between: “Swing, you bum!”


“I'll explain how to make you rich. Be fearful when others are greedy. And be greedy when others are fearful,” Buffett once wrote to his investors. In times when the stock markets are booming, investors should be cautious. During those times, companies are often overvalued and favorable entry opportunities are rare. In times of crisis, on the other hand, investors can go bargain hunting and expand existing positions. Many companies are undervalued then because investors are afraid of leaving stocks behind. But investors should keep their spirits under control, said Buffett. An investor's temperament should such that he feels great joy neither when he is walking with the masses, nor when swimming against the current. He should neither blindly follow trends nor make an investment simply because the masses reject it.


“In the short term, the market is a popularity contest. In the long term, a market is a weighing machine,” is a powerful statement by the investor legend. According to Warren Buffett, economic forecasts say more about the analysts themselves than about the future. Some problems are only revealed over time. In good times, difficulties in companies can be concealed easily. “Time is the friend of the wonderful business, the enemy of the mediocre.” Only during tumultuous economic times do you see who is swimming and who is going down. Berkshire Hathaway therefore largely ignores political and economic forecasts and focuses instead on the company's key figures. In addition, the holding company is always striving to learn from the past. “In the business world, the rearview mirror is always clearer than the windshield.”


Warren Buffett loves bargains. “Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.” Buffett’s investment firm Berkshire Hathaway follows the same mantra. The star investor prefers to buy companies that are in temporary difficulties. Extraordinary companies are only cheap to get when they are "lying on the operating table" – when their immediate future seems uncertain. Buffett's success is based on perfect timing: he looks at an investment object, analyses all strengths and weaknesses in detail, and when he is convinced he waits for the best moment. This moment can take years and can only last for a short time, so it is important to act quickly when it comes. “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

Status as of 14.12.2016 11:58


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