You know him as “the most successful investor of all time” and one of the richest people in the world. There are three key characteristics that made Warren Buffett a billionaire back in the 1990s, and these are patience, discipline and the ability to avoid risk. This puts him in the group of so-called “value investors” who evaluate the intrinsic value of a company instead of its shares and technical indicators – a strategy borrowed from its mentor, Benjamin Graham. Unlike others, Buffett has been accumulating his wealth slowly and over the years, investing wisely and always diversifying his portfolio. His personal training also contributes to his success – in his youth, Warren spends his time reading 1,000 pages a day. Today he still spends nearly 80% of his time reading books. And his immense wealth is built on investment principles that each of us could put into practice. Here are three of them:
Do the opposite of other investors
Buffett himself recommends us to be “more humble when others around us are greedy, and greedy when the rest are afraid.” In other words, when other investors are panicking and trying to get out of the situation, this is the moment to look for good investment in discount trading. Conversely – when you notice that everyone is in one place, then the time has come to leave the game. Modesty is Buffett’s hallmark. In his career, he advises us to always live within our means, and he sets an example for himself by living in his modest home in Nebraska, which he bought back in the 1950s for $ 31,500.
Buy businesses, not stocks
In his career as an investor, Buffett buys shares to own parts of a business, not because he hopes the price of the shares in question will go up. Whether he intends to buy entire companies or just parts of them, Buffett looks at a number of specific things: whether the company has a sustainable model and good management, such as Coca Cola, and whether it sells attractive goods at lower than competitive prices, like Wall-Mart. He asks himself, will the business of the company still be up-to-date in 50 years? An example of a sustainable business in his eyes is financial institutions, as people will always need to manage their money using their services. The next thing Buffett does is to check whether the company has debts and exactly what their size is, and invests in those that would survive in times of crisis. He looks for companies that are self-sufficient and do not need strong strategies to be in the right place.
Invest within the limits of safety
Anyone who hopes to master the art of investing like Buffett will need to learn first how to follow a basic rule – not to go beyond reason and invest within the limits of safety. In other words, it is a good idea to stick with the businesses and industries we know and understand well, which is one of the reasons Buffett himself avoided the technology sector until 2010. Applying safety margins, on the other hand, also means that it is good to buy only when there is a substantial discount to what is considered as fair value.
In resume, if we are to follow the steps and advices of Warren Buffett, it is a good idea to spend your money wisely, to be extremely careful when borrowing, to be aware of what the definition of success means, not to be afraid of the new and the different, to reinvest our profits, to diversify, to be persistent, to think long-term, to evaluate risk and to know when it is time to get out of the game.