Make a pretty penny, Warren Buffett style
Let’s set one thing straight. If you are considering investing, you need to know about Warren Buffett - an American business magnate, investor and philanthropist as well as the CEO and largest shareholder of Berkshire Hathaway. Oh, and, he also happens to be the second richest person in the world with a net worth of $73.9bn 😳. Clearly, he must be doing something right.
It feels like professional investors in London make tonnes of money effortlessly investing in the stock market while most of us mere mortals just about manage to beat inflation.
So, what are the main traits of “successful investors” and how do you become “good” at investing? We have gathered advice from market specialists and broken it down into easy-to-follow tips.
They have an investment philosophy.
Before beginning to invest, you need to set out your mission for investing.
Your investment philosophy is a set of guiding principles that inform and shape your investment decision making process. You should be able to go back to your investment philosophy at any time - for example, when you realise your existing strategy is not delivering the expected results.
Your investment philosophy should contain the following:
- Learning about how the markets work, how investors behave and why stocks fluctuate;
- Defining your attitude to risk;
- Researching what you can invest in;
- Setting your values: are you a social investor?
Remember, markets may come and go but your investment philosophy should remain the same! You can read more on Motif Investing.
They have investment goals.
Do you know why you are investing and what you want to achieve? According to Blackrock, the 3 most common types of investment goals are:
- Planning for retirement or buying a property / this is a long term goal, 15 years or more;
- Planning for life events, such as school fees over the medium term (10-15 years);
- Planning for an emergency or a “rainy day”/lifestyle to finance goals such as dream sports, cars, etc. over the medium to shorter term (5-10 years);
The minimum time horizon for all types of investing should be at least five years.
Make sure you revisit these goals and the time horizon regularly as your personal situation may change over time.
They have a diversification strategy.
What’s that, you ask?
Diversification is a technique that reduces risk by allocating investments among various financial instruments (i.e. equities, government bonds, etc.), industries, geographies and other categories. It allows you to get exposure to different areas, each of which would react differently to the same event.
Market shaping events such as Brexit reminded investors of the benefits of diversification, while keeping a long-term focus on investing in high-quality businesses. To quote the greatest investor Warren Buffett: “Diversification is a protection against ignorance. It makes very little sense to those who know what they are doing.”
They know when to buy and when to sell.
It’s obvious that your main objective when investing should be to buy low and sell high to make a profit. But don’t let your emotions drive your behaviour! When faced with market downturns, investors tend to panic and let their emotions drive their decisions.
Unfortunately, “investors who try to time the market to avoid the falls, or who lose faith and sell out at the bottom, are highly likely to miss the gains”. Read more on St James Place website.
We firmly believe that an analytical and methodical approach is incredibly helpful when you trade. You have set up an entry/buy price and an exit/sell price for each investment you make; this which will provide you with a loose structure around your investment strategy and help with controlling your ‘emotions’! Read this article for a great summary on making investing decisions.
And finally, our favorite quotes from star investor Warren Buffett
“Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”
“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”
“Stop trying to predict the direction of the stock market, the economy or elections.”
“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.”
Photo Credit: Unsplash - Matthew Henry.