Warren
Buffet, also known as the oracle of Omaha, is no stranger to the world
of investing. There’s a lot to learn from the most successful (and did
we also mention, the richest) man in the world of investing.
Here are six lessons from Warren Buffett that you can
#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.
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