Warren Edward Buffett is one of the greatest investors in the 21st century. Yet, many investors looking to become great investors like Buffett. Buffett is currently the chairman and CEO of Berkshire Hathaway. So there are some very important things to learn about investing when starting because not every investment brings you cash flow. Also, many successful entrepreneurs are excellent investors in the market because they know they can grow their wealth by investing instead of keep saving. Warren Buffett has presented some investing rules and strategies for investors to make a good investment for long-term returns from his own experience. Let’s learn what are those secret investment rules that Buffet has said to us.
How did Warren Buffett invest?
Warren Buffett has invested and owned shares in a number of top businesses in the world. Here are the top 10 with share value,
- Bank of America (BAC), 1.01 billion
- Apple (AAPL), 887.1 million
- Coca-Cola (KO), 400 million
- Kraft Heinz (KHC), 325.6 million
- Verizon (VZ), 158.8 million
- American Express (AXP), 151.6 million
- U.S. Bancorp (USB), 129.7 million
- Bank of New York Mellon (BK), 72.4 million
- General Motors (GM), 67 million
- Kroger (KR), 51.1 million
Yet, Buffett became a billionaire on May 29, 1990, at the age of 56. Today (8/9/2021) Buffett is among of top 10 billionaires in the world with 103.7 billion USD net worth. So let’s see what rules and strategies Warren Buffett followed to make such incredible investments to become a billionaire.
1. Never rely on a single income
As an investor, you are frequently looking to make more income streams to get more revenue. Buffet has said that never depend on a single income because making more income streams will help maintain financial stability. So if you have a job, it makes sense to do another part-time job, but here, Buffet has said investing your income will make a cash flow for the long term as a passive income.
IF you don’t find a way to make money while you sleep, you will work until you die.Warren Buffet
2. Never invest in businesses you can’t understand
The best advice Buffett gives to investors is not to invest in a business that you do not understand. Investing in something unknown can be extremely disastrous, so this investment rule requires you to have a good understanding of your investment because a poor investment will destroy your efforts and money in a second.
What an investor need is the ability to correctly evaluate selected businesses. Note that word “selected“: You don’t have to be an expert on every company or even many. You only have to be able to evaluate companies within your circle of competence.Warren Buffett
3. Live frugally
Frugal is a great habit that millionaires have, which make them financially secure by saving more money. That’s why many billionaires spend a simple life instead of a luxury. Buffett lives far below his means. It is a known fact that he drives an old, modest car. He still lives in the $ 31,500 home he bought in Omaha, Nebraska in 1958, and he gets breakfast at McDonald’s Drive almost every day.
So living below your means will help you in several ways. For example, you can save more money and double your investments by investing more in those sources that bring more profits. Furthermore, you can backup some extra finance to use as an emergency fund.
4. Reinvest Your Profits
If you are satisfied with the return on your investments, you should reinvest them to increase your income and build significant wealth. Also, many investors have boosted their wealth by using this strategy that Buffett said about investments.
Once Buffett and his friend Pol bought a pinball machine to put into a barbershop during high school. They made a good amount of money, so they bought more machines from revenue and established them in several shops. Finally, his friend sold that venture, and Buffet started investing in the stock market from that revenue.
5. Watch Small Expenses
Buffett always prefers to invest in businesses run by managers who consider small expenses. Do you know Warren Buffett once admired a friend who painted only the front side of his office building that faced the road? He appreciates the thrift so much. Also, he focuses on every single value of businesses as usual, and he once checked 500 sheets to see if the company owner was being cheated, and actually, he was. It is not greed at all because it should always be fair when it comes to business.
6. Look forward, not to the past
Many investors fail to comply with this rule that Buffet said for investments. Looking forward is important than looking past because investments affect the future, not to past. Buffett famously stated in the 1950s that “the investor of today does not profit from yesterday’s growth.” According to Buffet, it is less important to follow past trends to identify new opportunities. When deciding whether to invest in a company, focus on its history, not its future.
7. Always be willing to learn new things
Knowledge is an essential element to massive success. Having updated consistently will help to make perfect and wise decisions for investments. Warren Buffet is an incredible reader who spends 80% of his time in a day reading. Yet, Buffett suggests that anyone willing to achieve similar success as Buffet should read 500 pages per day. Also, there is a lot to learn outside of school, because the school does not teach you some of the essential facts about the economy. What have you missed from school? Learn more.
The best investment you can make is an investment in yourself…The more you learn, the more you earn.Warren Buffett
8. Know When to Quit
The risk of investments come when you do not know when to quit. Warren Buffett learned this rule when his teens. He went to the racetrack. He bet on a race and lost. To get his funds back, he bet on another race. He lost again. So he decided there is a definite time to stop and quit when he was close to losing all money. The rule he decided then is still valid for all investments today.
If you buy things you do not need, soon you will have to sell things you need.Warren Buffett
9. Assess the Risks
It is a common thing to have risks when you are growing. Also, taking risks is essential when it comes to investments. However, according to Warren Buffett, there are two main risks that investors should seek to avoid at all costs.
- The risk of permanent capital impairment.
- The risk of inadequate return on capital.
So those main risks will occur the lack of knowledge you have about the business. Also, Buffet said that many businesses that have massive volatility are not probably risky businesses.
Risk comes from not knowing what you are doing, so wide diversification is only required when investors are ignorant. You only have to do a very few things in your life so long as you don’t do too many things wrong.Warren Buffett
10. Be patient
Patience is another essential factor that helps to make a good investment. Investor Warren Buffett published a letter to investors on Sunday in which he asserted that “a patient and sensible monkey, who builds a portfolio by throwing 50 darts at a board that includes the entire S&P 500 could increase his capital”. Yet, Buffett reminded investors of Berkshire Hathaway’s investment strategy of growing wealth for shareholders patiently over the long term. Having a great patient will support you to hold and wait for returns in your stocks.
The stock market is a device for transferring money from the impatient to the patient.Warren Buffett
11. Don’t care what other think
Warren Buffett’s best advice to those who wish to succeed in investing is to ignore the opinions of others because if one invests in the opinions of others, one will suffer a worse fate. Also, others asked him why he was so greedy due to his behaviour of below his means. Buffett answered them quietly because he knew that luxury would ruin money and that finances would soon become unstable. So you can grow a direct path until you ignore what others think and say. But always should listen, because thinking that you are always right, destroying your destiny.
If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.Warren Buffett
12. Remember, anything is possible
Buffett has always said that all things are possible. He used to be plaster his wall with what he calls “instructional art” which includes newspaper front pages with screaming headlines about stock market crashes. Because he believes them encourage him daily and remind him to be always ready in investments because anything can happen at any time. So Warren Buffett used to be read and getting updated consistently for his investment. So he means that in order to do something, it is essential to have the right understanding of it. If you have a piece of good knowledge about what you are doing, everything is possible.