Here are six lessons from Warren Buffett that you can use to invest better.
#1: “If you buy things you don’t need, you will soon sell things you need.”
You can make more money not only by investing or taking up a second job, but also by resisting the temptation to go out and just splurge. As the saying goes – a penny saved is a penny earned.
Key Takeaway: To be a successful investor, you need to use due diligence. Spending wisely is not about being miserly, but about being smart. Invest in assets that give you good returns over the long term- one that helps you secure your financial future.
#2: “Price is what you pay. Value is what you get.”
Most of us know this- the money we pay for something and the value we get out of it, most of the time, does not have a correlation. You could possibly buy a posh apartment for 1 crore rupees. But staying in the apartment does not guarantee a high quality of life- does it?
When it comes to investing, especially the stock markets, the price of a stock is mostly governed by market sentiments and not necessarily by the profitability or value of the company itself. Warren buffet suggests to buy stocks when the price you have to pay for the stock is less than the intrinsic value of it. He says, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Key takeaway: Instead of trying to time the market and extract every rupee profit you can possibly get out of your investment, invest in assets that will generate inflation-beating long term returns and hold on it for a long time (In buffet terms, forever).
#3: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Warren Buffet recommends investing in undervalued stock with great potential and holding on to them forever. In-line with this philosophy (which undoubtedly worked so well, and still continues to work), buying shares of a wonderful company at a fair price is much better than buying a mediocre company at a cheap/bargain price.
Buffet notes that over the long term, mediocre companies gives much lesser returns compared to wonderful companies, so much so that the bargain price for which you bought the mediocre company stock does not seem like a bargain anymore.
Key takeaway: Don’t try and time the market or buy into NFO #mutual funds because the NAV is low. Invest whenever you have the money and hold it for as long as possible.
#4: Be loss-averse
Majority of investor’s measure performance solely based on return. Buffett advices that you should not strive to make every dollar a potential profit which involves too much risk. Instead you should be loss-averse. Preserving your capital should be your top goal. By avoiding losses you’ll naturally be inclined towards investments with assured returns.
As Warren Buffet puts it, “Rule 1, never lose money. Rule 2, never forget Rule 1.”
The takeaway: While Buffet talks about safety of capital, he’s referring to stock investing where you don’t become greedy and go after too-good-to-be-true stocks. Instead, you focus on stocks that are undervalued and are of companies that you understand and has long-term potential.
Many investors misunderstand this as a recommendation for investing only in Bank FDs or equivalent assets which are mostly considered safe. Investing in Bank FDs is almost always guaranteed to be a losing proposition over the long term since after-tax, the returns you get annualized are below inflation rate.
#5: Be tax savvy
Like all billionaires, Buffett too is tax savvy.
Be knowledgeable about tax laws and use them to your advantage. Before you invest, make sure you understand the tax implications of your investment.
For e.g. while investing in Bank FDs might give you 9% returns, the interest is actually taxable as per your tax-bracket. The real return, if you are in the 30% tax-bracket, will fall to just a little above #6%. Now, that’s below inflation rate and you are effectively losing money the longer you invest in it.
The takeaway: Understand the tax implications of your investment fully before making a choice.
6: Limit what you borrow
More is not always good- case in point, loans and credit card debt.
With daily offers from ecommerce companies, it might be tempting to buy that latest mobile phone on an EM. Considering the fact that the phone you bought for EMI (plus the processing fee which is in-directly the interest you pay for the EMI facility), and it loses its value over time (most cases, the moment you buy it), it is best if you limit your borrowing.
The takeaway: Borrow only when it’s absolutely necessary. When borrowing, make sure you understand all the fees associated with it. Sometimes, the real cost of bowing money will be hidden as miscellaneous charges like processing fee.