7 Warren Buffett Tips for Smart Stock Investing

We all have some future vision for our money saved after our expenses, and here, the investment world starts with different options. The stock market is one such option where most people invest their money. If you are also looking for the best investment option, consider the stock market. Hence, you must know the important tips and tricks from well-known investors like Warren Buffet, known as the most genius in the stock market world.

Warren Buffet is a renowned figure who has made the most profitable results from the stock market with all his secrets and strategies used to raise their profit.

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Here in this article, we will list the top 7 Warren Buffet tips for smart stocking investing that may help you to raise your profit and make huge money from small units. 

With compound annual returns of just over 20% over the last 55 years, Buffett has an exceptional investment track record. In other words, $10,000 would now be worth more than 280 million dollars if you had put that sum in his investment company, Berkshire Hathaway, in 1965.

Tip 1: Risk Comes From Not Knowing What You Are Doing

It’s common nowadays for individuals who are new to investing to begin buying stocks or cryptocurrency before grasping the mechanics of these markets. Warren Buffett’s sage advice to investors is to resist the temptation of trying to invest in everything that glitters and only invest in what you know.

For example, in his own words, even Buffett, the so-called guru of value investing, did not know how to come up with a price for technology stocks for a very long time, and for that reason, he did not purchase these stocks for many years. Only in the year 2016 did Berkshire finally buy the Apple stocks after careful analysis of the Apple business.

But then again, shielding himself from technology businesses was not challenging for Buffett. And this performance chart of Berkshire Hathaway versus Nasdaq really proves it, with Berkshire Hathaway staying ahead of the Nasdaq for most of these last two decades.

Buffett’s argument here is that there are plenty of opportunities everywhere if you know what you’re doing.

Warren Buffett once said, “Never invest in a business you do not understand.”

Tip 2: System Overpowers the Smart

For most of his unconventional investors, that advice would be amazing. He himself made billions out of his stock selections, and now For Warren Buffett, that advice for retail investors to use a low-cost index fund may seem surprising, but it undoubtedly makes sense.

Investment index funds impart their advantage with a system; it allows a systematic investment plan bimonthly under the timeless and diverse umbrella. In other words, Buffett wants retail investors to adopt a system above everything else.

It is this system that located and deciphered a great business at decent prices and that has steered Berkshire Hathaway for half a century to become one of the world’s biggest and most profitable corporations.

“A low-cost index fund is the most sensible equity investment for the great majority of investors.” Warren Buffet. 

Tip 3: Have an Owner’s Mindset

From Buffett’s viewpoint, purchasing a stock equates to acquiring a business, and one should apply the same thorough analysis and due diligence as when buying a company.

For instance, if someone proposes to sell you their company for Rs. 500 crores, you wouldn’t just hand over the money without first understanding key details such as the company’s profit margins, competitive advantages, growth potential, associated risks, and necessary capital expenditures.

Buffett emphasises that rather than fixating on the stock price’s recent fluctuations, you should focus on evaluating the business that the stock represents. Once you have clarity on these critical questions, invest in a business you would be comfortable owning for the next 10 to 20 years.

A prime example is Berkshire Hathaway, which embodies an owner’s mentality with its long-term investments in companies like GEICO, Coca-Cola, American Express, and Wells Fargo, among others.

“That whole idea that you own a business you know is vital to the investment process,” says Warren Buffett.

Tip 4: Be Fearful When Others Are Greedy And Be Greedy When Others Are Fearful

The stock exchange is cyclical in nature, influenced by emotions such as greed and fear. In times of greed, investors are willing to spend above the actual value of a firm. In plain terms, when the element of fear exists, even the strongest of firms can be bought at a reasonable price, and those that can control their feelings win.

This is a technique that Warren Buffet has mastered and encourages other investors to do the same. For instance, the 2008 global financial downturn created a lot of fear that many investors lost their investments as they didn’t believe these businesses could survive for the long term. Nevertheless, Buffett did not waste time and quickly invested back into well-known blue-chip companies such as General Electric, Goldman Sachs, Banc of America, Mars, and Dow Chemical. Supposedly, by the end of 2013, the investments had yielded about $10 billion in profits.

In his letter to shareholders in 2018, Buffett stated, “It is not intelligence, an economics degree, knowledge of complicated financial words like alpha and beta, or anything else that prevents a person from taking advantage of an opportunity. What is required from investors is the capacity to block out pervasive fear or excitement of the market and concentrate only on some basic facts. It is also important to not mind being, or looking, boring for a long period of time, or even stupid.”

In other words, Buffett encourages investors to skip the conventional ways of investing and more focus on the rational side of the investment, which allows better chances of profits.

“What they need is the ability to dismiss the fears or enthusiasms of the mob and pay attention to a few simple facts,” said Warren Buffett.

Tip 5: Save For A Golden Rainy Day

Besides being witty, Buffett is also a mean miser. It is said that he does not spend more than 3 dollars and 17 cents on breakfast. Warren Buffett goes by the philosophy—hold onto your money when money is cheap and spend aggressively when money is expensive.

This was seen in the year 2000, and then again in 2008, when every financial expert was criticising him for holding onto billions of dollars in cash and not deploying it in stocks. But what they didn’t know is that Buffett was saving all that cash to be used when companies came down from the then astronomical valuations to more reasonable prices.

The key investment lesson here is that when life gives you lemons, do not merely make lemonade; make a lemon pie, lemon jam, or lemon pickle, and sell all the remaining lemons at the bazaar for a substantial fat profit.

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When a downpour of that sort occurs. We must rush outdoors carrying washtubs and not teaspoons,” said Warren Buffett.

Tip 6: Never Invest Just Because A Company Is Cheap

Because of Benjamin Graham’s influence, who is often recognised as the original value investor, it might be expected that Buffett will have affection for companies that are faith-undervalued. After making a couple of bad purchases and investments in the beginning, however, he has developed a heed against such a low-cost business, which may be low priced but may not be a good venture.

Actually, when he purchased Berkshire Hathaway, the company was largely textile operations, and the stock was selling for a considerable discount to its book value. However, upon managing the company, Buffett found out that it was a cash-burning machine and every dollar earned by the business was reinvested in it as capital expenditures.

This motivated lesson, together with much help from his long-time investment mentor Charlie Munger, gave a conclusion to the fact that even Buffett has not remained adhered to the stereotypical cigar-butt investing approach. Instead, one seeks to value the competitive advantages, intangible aspects such as brand and cost strength, or solid growth to come.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” — Warren Buffett.

Tip 7: Time Is The Friend Of The Wonderful Business

Warren Buffett understood the power of time in investing and has benefitted from compounding.

Imagine two businesses. The first one, Company A, grows by 20% every year, and the other one, Company B, grows at 10%. When we run compounding on these two businesses, company A would double company B’s output by the 8th year. On an accelerated basis, company A will become five times the size by the 19th year and 10 times B by the 27th year.

This effect of compounding is also visible in how his personal wealth has grown over the years, with him making a lot more money in the last 10 years than what he made in his 50 years.

Buffett extends the concept of “time as a friend” to the businesses he acquires by viewing them not for 1, 2, or 3 years but over the next 20 to 30 years. This learning is especially important nowadays when most investors operate on a daily, weekly, or a few short-term horizons and most certainly do not get any compounding advantages.

According to Warren Buffett, “Time is the friend of the wonderful company, the enemy of the mediocre.”.

Conclusion

Even though Warren Buffett is perhaps one of the most successful investors in history, many investors can adopt his strategy even if they don’t want to stay in the market for a long time. If you concentrate on applying Buffett’s ideas, you, too, may become rich or see a significant increase in your net worth.