Too many articles and books havee been written about Warren Buffett, a world renowned value investor. His snippets of wisdom in the form of quotations and investing strategies have been overly repeated. However I believe that if investors are to read just one book about Buffett, then it has to be “How Buffett Does It’ by James Pardoe. This book succinctly and beautifully articulates Buffett’s investment principles in the form of 24 simple investing strategies. I’ve selected some of the best investment lessons from this book that will serve as an indispensable guide to making shrewd investment decisions.
1) Choose simplicity over complexity
The stock market isn’t a mysterious entity reserved only for the finance professionals. One of the wonders of investing is that you don’t require an advanced degree in accounting to be able to independently select stocks of your own. The internet is abreast with ‘get rich quick schemes’ promising the latest computer program or theory to deliver the gullible investor instant riches. Most turn out to be ‘get poor quick schemes’. The old adage – ‘If it sounds too good to be true, it probably is’.
Buffett believes in ‘keeping it simple’, by this he means only investing in easy to understand businesses, run by honest and competent people. My favourite financial writer and analyst ‘Morgan Housel’ compares investment advice to medical advice. In it he explains why complex and breakthrough treatments will never be as effective as the simple common sense advice of ‘eat healthy and exercise’. The problem he adds is that advice which sounds basic isn’t valued as complex and sophisticated advice which sells better and sounds more important.
Albert Einstein: “Make everything as simple as possible, but not simpler”.
2) Make your own investment decisions
Buffett believes that financial professionals and wall street pundits bring nothing to the table who often have vested agendas and conflicts of interest. They are frequently salespeople peddling investment products or brokers who benefit from activity – commision derived from buying and selling of investments. They don’t earn an income when clients hold shares for the long-term.
Investing in the stock market requires a basic knowledge of accounting and the financial markets. One such book which I thoroughly recommend is ‘Shares Made Simple’ by Rodney Hobson’, a respected financial journalist. This is a beginners guide to the stock market, Rodney strips away the arcane jargon and mystique surrounding the financial markets.
3) Control your temperament
Investors should not let emotions get in the way of making the right decision. Too often investors experience the extremes of fear and greed, which drive the market in the short-run. These emotions can often cloud their judgement. Benjamin Graham (author of ‘The Intelligent Investor’) said that “the investor’s chief problem, even his worst enemy, is likely to be himself”. He realized that in the face of extreme events, investors often panic and behave irrationally.
Investors instead should behave more like ‘Spock’ (fictional character from the Star Trek series). Spock would think logically, look at all the data and facts before reaching an objective conclusion. In the face of highly volatile markets, the astute investor will remain calm and disciplined.
Hargreaves Lansdown, a financial services provider has a motto for retail investors: ‘Time in the markets, not timing the market’. I couldn’t agree more.
4) Be patient
Benjamin Graham, Buffets mentor, believed that the market is a voting machine in the short- run, tallying up firms which are the most popular. Whereas in the long-run, the market is a weighing machine, analysing the fundamentals of a business. Buffett therefore believes that investors should be willing to wait for a 5-10 year time horizon, in order for their stocks to reflect their future earnings potential. Buffett was a ‘decade trader’ and not a ‘day trader’. Charlie Munger, Buffett’s long-term business partner described the need for patience less elegantly, by saying “Investing is where you find a few great companies and then sit on your ass”.
5) Buy businesses, Not Stocks
Investors often forget that when you’re investing in shares, you are buying a part of an actual business. As an owner of that business, you share in the profits and growth of that company through dividends and capital appreciation. A share is not a lottery ticket, and hence investors should be looking to invest in businesses, and not pieces of paper.
6) Build a concentrated portfolio
The simple adage ‘don’t put all your eggs in one basket’ is a valuable technique to minimize investment risk. However diversifying too broadly can actually spoil a portfolio. Buffett believes that investors should avoid the ‘Noah’s Ark’ style of investing, that is I’ll have a little of this, and a little of that. Investors should instead become an expert in a small number of a companies, rather than possess little knowledge of many stocks. It takes courage and conviction to hold a concentrated portfolio of high quality companies, but it is this principle that has made investors like Buffett and Keynes extraordinary wealthy.
Interestingly, columnist Morgan Housel highlight an internal study by Fidelity Investments to see which Fidelity investors performed the best. The results were staggering: the winners were deceased customers and investors who had forgotten they even had accounts with Fidelity. It highlights how fidgeting, tweaking, rotating, buying and selling damage investment performance.