The Oracle of Omaha, Warren Buffett has built his personal fortune to more than $84 billion making him the second richesperson in the world. He made his fortune by investing diligently in the financial markets.
Hands down, there is nobody better to turn to advice than Warren Buffett. He has written books and talked in seminars regarding various tips that you should follow when building your wealth. These tips are not for the financially knowledge but for any Tom, Dick and Harry who knows the basics about investing.
Here are 7 tips by Warren Buffet that you should imbibe in your daily life.
1. Never invest in something you don’t completely understand
“Never invest in a business you cannot understand.” – Warren Buffett
Though an obvious tip, it is important to drive this concept home. Nobody wants to lose money. Hence, avoid risk whenever you can. To be happy and successful, don’t invest in any investment scheme that you do not understand no matter what the gains. With this rule in mind, Buffett has been able to save himself from investing in risky schemes.
2. Cultivate healthy financial habits
It is said that it takes 21 days to form any habit. And most behaviour is habitual. We all carry habits that we wish to break and even more that we would want to form. The most important of all habits is saving money, consistently. The perfect solution to create this habit would be to use automatic deductions from your pay-check or automatic transfers from your savings account.
This would lead to creating the habit of saving as seamlessly and efficiently as possible.
3. Get high value at a low price
“Price is what you pay, value is what you get.” – Warren Buffet
Many a times, we often lose money when we end up paying for something more than its value is worth. For example, when you use your credit card, at the end of every month, you end up paying a lot more interest than what the value was worth. Or, when you purchase anything, be it a stock or piece of real estate, when everyone is buying, it will always be overpriced. This is the simple principle of demand vs supply. Be it socks or stocks, Buffet only buys it when it is marked down.
4. Set long-term financial goals
“Our favourite holding period is forever.” – Warren Buffett
The mistake that most people commit when trying to catch the wavering wave of rising risks and high returns is to cash in on in the short-term. Warren Buffet believes that this kind of thinking almost always gets people in trouble. He believes that it is necessary to invest with a multi-decade horizon outlook in mind. Instead of trying to make a quick buck, focus on increasing your purchasing power over your lifetime. He strongly believes that quality businesses earn high returns and increase their value over time. Fundamentals can take years to impact a stock, a mutual fund’s performance and the value of your portfolio in general.
5. Always have cash
“Cash is to a business as oxygen is to a body: “Never thought about it when it is present, the only thing in mind when it is absent.” – Warren Buffet
In an interview, Buffet shared that Berkshire Hathaway always has at least $20 billion in the form of cash or cash-equivalents. This was so in case it needed to be drawn at any instant. In retrospect, this is a very risk-averse strategy which means sacrificing the larger gains that could have been gained by investing. But, by doing so, Buffet had been able to save himself and his company during the 2008 financial recession.
He does not believe you need to stash $20 billion to hide in your home. Just take a considerable amount from your income in the form of cash, money market instruments or cash equivalents. This is a sound advice when you are an entrepreneur and have an unsteady income.
6. Investing is not rocket science, but it is also not easy
“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.” – Warren Buffett
One of the greatest misconceptions present in the market is that only sophisticated people can pick the best stocks or investment schemes. It does not take much to follow a few investment tips and analyse the market to invest diligently. It is important to not believe that there is an easy way out when investing.
Be it stocks or mutual funds or any other investment scheme, it is important to gather information from every source, analyse the same and make decisions accordingly. It is not a child’s play, but you do not need to be an aficionado either.
7. The smartest moves are the most obvious ones
“We make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it.” – Warren Buffett
Investing in stock markets or balanced funds is not a get rich scheme. It is a method to build your wealth over a given period. It is not meant to be exciting and have huge returns all the time.
The goal is to find quality businesses that will compound in value over the course of a period time. If you can get this in place, your portfolio’s return will take care of itself.
Warren Buffet, a man with much wisdom who has helped millions to create their wealth and grow their portfolio exponentially is someone to look up to. You can try to figure out how you can imbibe these tips in your life and toward the growth of your wealth.