Last Updated on May 24, 2022 by Anjali Chourasiya
Warren Buffett is one of the richest men on the planet and the most successful investor of all time. Many have copied his quotes and investment styles to build their wealth. But, Buffett did not have it easy. It took him years of perseverance, mistakes he learned from, rock-solid investing principles and a dedicated outlook, for Warren Buffett to amass the billions in his lifetime.
Called the Oracle of Omaha, here are some investing secrets of Warren Buffett, which, when put to practical application, may aid you in making informed decisions that may be the right investment choices.
Table of Contents
Secret # 1 – Value investing works
Value investing is one of the cornerstones of Warren Buffett’s investment portfolio. In his own words- “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. Warren implies that expensive valuations need not mean a company is fundamentally well and would do well in the future. Companies should be studied in-depth, and only then investment decisions should be made.
Buffett prefers to invest in stocks that have high intrinsic value but are under-priced because of limited popularity. He believes that the market would eventually recognise such undervalued stocks, increasing their prices multifold.
How to apply this secret in your portfolio?
To follow the value investing approach, you need to assess a company fundamentally and technically. Check in-depth if the company has sound management and is financially stable. If the price is undervalued, i.e., the current market price of the share is less than the intrinsic worth of the company, and the company has the potential to grow, investing in such a company could turn your fortunes in the long term.
Secret # 2 – Long-term is the way to go
Buffett says, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”.
Buffett, flag bearer of long-term investing, is a fierce advocate of the same. He urges investors to have patience when investing. He believes that you can ride out market volatilities with a long-term approach. Moreover, the compounding of returns helps your portfolio value multiply.
Many individuals who have studied Buffett closely believe that his empire, valued at billions, was built by the deep emphasis he laid on the importance of a long-term horizon and follow it sincerely.
How to apply this secret in your portfolio?
Selecting the right stocks/assets can be a game-changer for your portfolio. Invest in only those stocks that display potential in the long run. Finally, be patient with your investments. Give them time to create a substantial corpus rather than getting tempted to redeem early.
Secret # 3 – Business quality is important
Buffett stated – “When I buy a stock, I think of it in terms of buying a whole company, just as if I were buying a store down the street”. He implies here that he believes in assessing the quality of the business, no matter what size the business is. Every aspect of a business should be studied in detail. Just because a company is large-scaled does not mean the business is well and vice versa.
Thus, as per Buffett, the secret to success is in analysing the company as a whole, not just its stock and the corresponding price movements.
How to apply this secret in your portfolio?
Don’t be hasty when picking out stocks. Do detailed research. Assess the overall company whose stocks you are seeking to invest in. Lastly, do not judge a business based on scale or size. Only quality should matter when picking stocks.
Secret # 4 – Market corrections are normal
Buffett stresses the fact that investors should not panic when markets fall or undergo corrections. These are common aspects of the stock market. Markets run in cycles – there are peaks, and there are troughs. Investor sentiments, being human behaviour, may be unpredictable but have a deep impact on the direction of the markets. Investors should not be afraid of corrections and volatility in the markets or be waylaid by the reigning market sentiment. It is important to stay the course for your investments to tide over the volatility.
In fact, market corrections can be a great opportunity for you to buy quality stocks at reduced prices. To quote Buffett – “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”.
How to apply this secret in your portfolio?
If you invest in stock markets, be patient in market volatilities. Stocks are always associated with short-term volatilities. So, rather than panicking, identify quality stocks trading at a discount. Use this opportunity to invest in such stocks so that when the market recovers, you can make a fortune.
Secret # 5 – Get out in the case of continuous losses
Buffett stated, “The most important thing to do if you find yourself in a hole is to stop digging”. Warren throws light on a lesser-discussed aspect of market losses – embracing them and moving forward.
It basically means that if you are incurring continuous losses on an investment, it is better to sell it and cut your losses. While short-term volatilities might drive the stock prices down, some stocks might not recover at all if the business is not built on a solid foundation. As such, Buffett advises that you should monitor your loss-making investments closely.
How to apply this secret in your portfolio?
Keep a tab on your investment portfolio. Should you notice continuous erosion of value over longer time periods, and you do not see any potential for a recovery any time, it may be best to exit. Don’t be afraid to get rid of such assets and cut your losses.
Conclusion
Warren Buffett’s investment style is based on timeless and fundamental principles. Buffett studied his markets right, held his nerves in turbulent times and placed large bets on undiscovered, undervalued companies.
You can use the aforementioned secrets and apply them to your investments. You might suffer some road bumps along the way, but if you stay the course, follow these secrets and monitor your investments, you may also be able to turn your humble savings into a sizable corpus that helps fulfil your financial goals.
